Charles “Chuck” Schwab has made his name synonymous with personal investing.
Schwab, 82, is the namesake founder and chairman of the financial services company that was a pioneer in bringing low-cost investing to the masses. Business Insider spoke with Schwab over the phone at the beginning of this month, on the day his firm announced it would be eliminating fees for all trades.
It was a move largely in response to no-fee upstarts like Robinhood, and competitors TD Ameritrade, E-Trade, and Fidelity followed Schwab, despite a tough reception in the market.
Schwab is overseeing more changes at his firm, as it adjusts to a low-interest-rate environment (most of its revenue comes from interest on assets). But as Schwab shows at length in his new memoir, “Invested,” this is far from the most difficult time he’s been through.
In our interview, we discussed turning points in his San Francisco-based business over its 48 years of operation, and ended by taking a look at where it stands today.
The following transcript excerpts have been edited for clarity.
May 1, 1975 — The day that changed everything
Richard Feloni: A day that might be the most important in this whole origin story would be May 1, 1975, when regulators abolished fixed rate commissions. What was investing like before that?
Charles Schwab: Well, for the average Joe, it was so expensive that you became discouraged. And not only walls in terms of the pricing or the way they did things, but also the delivery of it. The delivery had to be usually through very expensive, commission-driven salespeople who had a record of not always doing things in your best interest. They led so many stories with bad outcomes, so it was sort of a jungle.
Feloni: What was your emotional reaction to discovering the news this was changing?
Schwab: I was totally excited at the fact that we had a unique position of lowering rates substantially while the major leader in the business, Merrill Lynch, raised their rates. That left a huge gap between what they were charging for their transaction capabilities and what I was doing
I was thinking about developing an incredible business for the individual investor that would be beneficial for them; lower rates and lower barriers to get in it to investing, and a whole different method of delivering investment services.
Feloni: Was Wall Street in an outrage or a panic over this change?
Schwab: Well, there was lots of consternation among Wall Street people. They thought, “Oh, my goodness, our ability to create all these wonderful research reports. Who’s going to pay for it?”
The industry had been guarded for years, been protected by fixed rates — I mean, that’s what you call a monopoly, or a government-sponsored monopoly. And all this came down and all hell broke loose.
Building a company in his name
Feloni: As you were building out Charles Schwab in the wake of this, did it feel like you were taking a pioneering approach at the time? Where was your head at during those early days?
Schwab: You mean how many arrows did I have in my back? There were too many.
Feloni: How did you know that this was something that was worth pursuing, then?
Schwab: I have absolute and complete empathy for the individual investor.
You can imagine the industry was like the post office — every stamp costs the same — and all of a sudden it had all this structure that was built around it. And of course it led to many, many firms going out of business or using merging to get out. I ought to show you the graph of the names and the consolidations that happened in the next 10 years. It’s pretty amazing.
Feloni: When you were building out your team, what were you looking for when you were hiring someone to take over a significant amount of responsibility that you would have to pass to them?
Schwab: The number one thing to me was, well first of all they’d appear to be quite intelligent — at least measured against me, which was pretty easy. But they also had to have an interest in investing. Someone had to be thinking about the issues that investors had or were feeling at that time.
In the early days, it was very hard for me to hire people with any kind of a résumé. We were a startup company that was flying by the seat of our pants, and we had no certainty of success in front of us. So who’d want to put their life’s work in my hands, so to speak? You had to have a pioneer’s kind of perspective.
Selling to Bank of America
Feloni: Bank of America approached you in late 1980, and then the deal goes through in 1983. You wrote that this was a validation for your company. How did the deal feel?
Schwab: Well, when you got the stamp of approval from probably the most recognized bank in the world, that was pretty impressive to me. I thought that would really enhance the reputation of our company and really the business of the company.
Feloni: It didn’t end up as planned, of course. Looking back on it, what would you say your main lessons are from your experience under Bank of America?
Schwab: I learned an awful lot being associated with a massive company. Big board of directors, 60-70,000 employees, a Bank of America branch on almost every corner in California.
It was sort of awesome in some respects. Imagine walking into a room with 27 people at the board, sitting with the wonderful leather bound reports there in this enormous room, and you’re on the 60th floor of the Bank of America building. You’re looking out the window and say, “Jesus, what happened to me?” I was the youngest guy in the room [he was 46 when the sale went through]. It was an amazing moment.
Feloni: Did that change your perspective of how you saw yourself and your own company?
Schwab: Well, fairly soon thereafter, there was disappointment at how unengaged these people were. I was the largest individual shareholder in the bank — something like one percent of the company — and so I had a keen interest in having this company run well. The majority of the board didn’t have that. As I got into it deeper and deeper, I saw all the flaws.
You only got on that board if you had a lot of public prestige. That’s how they selected their board members, not based upon their commitment to making the company run better.
I thought financially it’d be a great long-term win, but it turned out to be a short-term loser.
Pivotal year of 1987
Feloni: And 1987 really sticks out as a significant year for you and the firm. So first of all, you buy back Charles Schwab from Bank of America. How did you know that it was time to do that?
Schwab: There was two years of dissatisfaction and negotiations that led up to that moment in time. And I finally was so exasperated with the situation, I resigned from the Bank of America board in order to go ahead trying to organize the buyback of our company, whether it was going to be hostile or friendly or what. I didn’t know. But I entered into a company that didn’t fulfill the promise to me in terms of its long-term growth and they had nothing but problems. It really stunted my growth as a company because there were so many things I had to do, we needed to do, in order to build a company that would serve our clients.
Feloni: When you finally have the company back under your control and the dust settled, did you regret ever selling the company in the first place?
Schwab: No, no, no. I’m probably way too much of a positive guy. I have no regrets. I would do it again.
I just remember it as a very positive stepping stone in my development of Schwab and my personal career. I was damn lucky to get it back!
Feloni: You took the firm public after that. This was the second attempt, and the first time it failed. What was different the second time? How come it became successful?
Schwab: Well, we were four years along. We’d been owned for a while by Bank of America, so we had the credentials. We were a completely different company. We were two or three times the size and had major significant advisors, whether it was auditing firms or law firms, and a track record of enormous growth.
Feloni: And then you top it off with the market crash on October 19.
Schwab: It was a big year!
Feloni: What was going through your head as that was happening?
Schwab: Well, I knew there was a major earthquake in the business, but I’d been through a couple of those before and I knew that it wasn’t going to be the end of the world. But I needed to pull all the stops out in terms of making sure that we survived this, to have ourselves in place for the next upturn. Not easy. It’s emotionally just absolutely draining, and the work is hard, and it’s trying to instill confidence in other people that the direction you’re going is the right direction.
I think I was just lucky in many respects about my emotional makeup.
Feloni: Well after surviving that downturn, what did you take from that that allowed you to deal with future downturns or just states of panic in terms of leading your company, and assuring both your employees and your clients that things were going to be OK?
Schwab: I studied the stock market. A lot of us studied the stock market movements of the last hundred or 200 years. I had a lot of confidence based upon my sense of what was happening; what happens in panic markets and how things are created in these down moments that might go on, the severity might go on for several months as such. But human behavior goes to some extremes in terms of emotional responses.
You look at the logic of the economy, the basics of what’s going on. Know the industry you’re in; know what happens over time periods, and it gives you the confidence to see your way through the maze.
Reinventing the company in 2004
Feloni: Well, I want to get back to even just this idea of your evolution as a leader as well. So in 2004, you had a rough year and you had to fire David Patrick as your CEO. You said that sometimes it takes a founder to make the hardest decisions for the company.
Schwab: For sure, absolutely. I actually wrote a letter one time on this when Microsoft was having a problem. I thought Bill Gates needed to settle this thing. He’s the only guy in the world that could move that company in a different direction. In my case, only I could really make the really, really tough decisions because I needed to maintain the confidence of our remaining employees — 80% remained. It was the nadir of our company.
Feloni: So at that point, did you see that in order to keep going forward you had to essentially reinvent the company?
Schwab: Essentially, it was a reinvention. At the time I didn’t quite put it that way, but looking back on it now it was a reinvention. We’ve moved from simply being a so-called transaction specialist to basically a full-service company. And where we had a relationship, we moved from transactions to a relationship with our customers.
In the early days, you would look at me and say it’s basically a transaction or a discount company, pure and simple. Today, I hope our clients think of us in having a much more engaging relationship with us. They can have people who talk to them weekly, or they can elect to have a less engaged involvement, just do things online and never talk to anybody at Schwab. At least they have choices.
No more commissions
Feloni: As for the announcement of omitting stock ETF and options commissions, can you give me insight into what the timeline was for making this decision? When did this first come up as an idea to be discussed?
Schwab: Oh, I’ve been contemplating this for years.
It’s a fulfillment of something I’ve wanted to always have. I’ve been a great fan of Google for many years, and the offering called “free” is a pretty incredible, liberating thing to have. We’ll have a very successful business. People will come to us to do business and we’ll be able to charge them for other kinds of things, but the fundamental access to equities is now free. What an amazing achievement to do that in 40 years — from fixed rates to zero.
We first really started talking about it at least 10 years ago. At least.
You’ll see we’ve been going down ever since 40 years ago to now we’re at $4.95, and hell, that’s pretty darn close to zero as it is. We used to say we did transactions for tips, so why not take the tips away and just make it zero?
Feloni: After this announcement today, the stock fell around 10%. What was your reaction to that?
Schwab: I thought that was a wonderful recognition by the marketplace that we were doing something extremely important. And you can say well, it only went down 10%. I think people have the confidence we have a fundamental business that will continue to grow indefinitely and we took out the last barrier to that sense of great value here at the company.
You see the reevaluation that they put on the whole industry. I just think it was the right thing to do.
Feloni: What about getting through this low rate environment and the challenges with that?
Schwab: It doesn’t trouble me. We’re at the heart of one of the greatest capitalist countries in the world, America. We have an economy that will continue growing at 2-3% per year for as far as the eye can see. A company under that umbrella of growth will continue to innovate, and create new values and new services for people, and new employment, all those things. There will be times of some downside. The optimism that I have about the future is pretty robust, and this company is simply the heart and soul of what capitalism’s all about, creating wealth for people.
Feloni: And are you preparing for rates going lower?
Schwab: Maybe interest rates are going to zero [laughs], I don’t think so. I don’t think you’re going to be able to hit zero. There’s no lender alive that’s going to borrow at zero, except the US government, maybe. But economies go through cycles, and there’ll always be some interest rate there.
Feloni: Your company has been pushing a subscription service for financial planning.
Schwab: It’s a way of doing it where it’s not incentivized by how large your account is. We just need to give you a great fundamental service. And the more you have, the more we’re going to make.
Feloni: Do you see the broader industry going in that same direction, with subscriptions?
Schwab: I don’t think they can afford to. I don’t think, their business models don’t permit it. We have a very low cost of doing business. We’re probably the lowest cost of doing business of any significant financial services company. We’ve run our company really with the attitude that we want to keep our costs low so that we can provide wonderful service with technology at our back.
I think one of the areas that I worry about a lot is that there are 10,000 people retiring every day. Most of them don’t have adequate sums, or worry about will they have enough money for the remainder of their life. How do you manage that issue? So we’ll be introducing some services that will really help people manage their limited resources through the remainder of their life by really helping them to organize their assets and their resources to do a better job of it.
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