QUOTE AND NEWS
Benzinga  Oct 26  Comment 
This weekend in Barron's online: a look inside Charles Schwab, a contrarian way to play the energy slump, as well as the prospects for Amazon.com, Apple Pay and more. Cover Story "Inside Schwab" by Dyan Machan. CEO Walt Bettinger took up the...
Clusterstock  Oct 24  Comment 
FA Insights is a daily newsletter from Business Insider that delivers the top news and commentary for financial advisers.  Don't Freak Out, The Recent Volatility Is Normal (Charles Schwab) Everyone's been talking about the recent spike in...
Jutia Group  Oct 24  Comment 
[at Barrons.com] - Charles Schwab (SCHW) and Morningstar (MORN) have struck a deal. Under a licensing agreement announced Thursday, roughly 7,000 financial advisers who hold client assets in custody with Schwab will have access to global equity...
Jutia Group  Oct 23  Comment 
[Business Wire] - The Board of Directors of The Charles Schwab Corporation has declared a regular quarterly cash dividend of $0.06 per common share. The dividend is payable November 21, 2014 to stoc Read more on this. The Charles Schwab...
Benzinga  Oct 23  Comment 
Randy Frederick says that people probably use to think that options traders were always speculating, taking a lot of big risks and putting a lot of money down waiting for big gambles to pay off. Frederick is the managing director for trading...
Forbes  Oct 23  Comment 
Billionaire brokerage titan Charles Schwab shares his secrets to successful investing and planning your financial future.
TheStreet.com  Oct 21  Comment 
NEW YORK (TheStreet) - Is your broker working for you or against you? According to David Pottruck, author of Stacking The Deck and former CEO of Charles Schwab , many of today's advisors are under pressure to sell their own companies'...
Forbes  Oct 18  Comment 
Social session: Chuck Schwab answers Forbes readers' questions on investing, from how to get started to how to get wealthy.
Forbes  Oct 18  Comment 
Forbes  Oct 17  Comment 
Schwab’s trading revenues declined by 7% y-o-y to $209 million in Q3, owing to low trading volumes during the quarter. Robust growth in interest-based revenues and asset management revenues more than offset the decline in trading revenues. Net...




 

Charles Schwab (NASDAQ: SCHW) is one of the original brokerage firms to offer individual investors the opportunity to buy and trade equities at a discount. However, in recent years, Schwab has transformed itself from a discount broker focused on driving commissions into an asset management company, making money by charging a percentage of clients' assets as a fee for financial services. For the full year 2010, Charles Schwab reported a total revenue of $4.51B and a net income of $454M.[1][2]

Schwab used its transformation to establish a firm foothold into the mass affluent marketplace, a segment which represents 60% of the $25 trillion in U.S. retail investing assets. With this focus on mass affluent customers, Schwab has carved out a unique position between the discount and traditional brokers. The downside is that Schwab faces competition on multiple fronts, especially as it continues to expand into areas such as 401(k) management, mortgages, and full service financial consulting.

Business Overview

Investor Services (66.97% of 2010 Net Revenues)

Schwab Investor Services (SIS) provides retail brokerage and banking services to individual investors, as well as 401(k) and other retirement plan services to corporations. Its offerings range from self-directed research tools to full service financial consulting.[1]

Institutional Services (33.03% of 2010 Net Revenues)

Schwab was one of the first companies to offer services, such as trading tools and marketing support, to independent investment advisors (IAs). Schwab is currently the largest provider to independent investment advisors at more than double the market share of the next largest competitor. This customer segment accounts for approximately one quarter of revenues and earnings. This division also includes Advisor Services and Corporate and Retirement Services.

Revenue Sources

Asset management and administration fees - include mutual fund service fees and fees for other asset-based financial services provided to individual and institutional clients. Schwab earns mutual fund service fees for shareholder services, administration, investment management, and transfer agent services provided to its proprietary funds, and recordkeeping and shareholder services provided to third-party funds.

Net Interest Revenue

Net interest revenue is the difference between interest earned on interest-earning assets and interest paid on funding sources. Net interest revenue is affected by changes in the volume and mix of these assets and liabilities, as well as by fluctuations in interest rates and portfolio management strategies.

Trading Revenue

Trading revenue includes commission and principal transaction revenues. Commission revenues are affected by the number of revenue trades executed and the average revenue earned per revenue trade. Principal transaction revenues are primarily comprised of revenues from client fixed income securities trading activity. Factors that influence principal transaction revenues include the volume of client trades, market price volatility, and competitive pressures.

Trends and Forces

Interest rates effect on SCHW's revenue drivers: fees and commissions

Schwab, like all asset management firms, generates revenue on assets by charging fees and gaining interest on the money it manages. Revenues based on commissions are susceptible to swings in the stock market, which are linked to general economic conditions. In a bearish market, the trading volume is relatively low and this in turn decreases revenue from commissions. On the flip side, an upturn in the market will increase trading volumes and hence commission revenue for Schwab. In periods of economic uncertainty, trading volumes can spike significantly, reflecting investors' apprehension about the future of the economy. Commission revenues are a function of trading volume and price per trade. The key volume driver measured by brokerage firms is daily average revenue trades, or DARTs. Commissions will become increasingly important to drive revenue due to mounting pressures from other discount brokers and retail banks. Given that fees and commissions account for the largest portion of revenue for its overall business and that those revenues are decreasing, Schwab has continued to emphasize "upselling" higher margin products, such as its own mutual funds, comprehensive financial consulting, and 401(k) management.

Mass Affluent Customers

The primary drivers of asset accumulation are the number of total clients and average assets per client. Schwab has leveraged both drivers in recent years by going after the mass affluent investors, an important customer segment that represents about 60% of the $25 trillion in U.S. retail investing assets. Mass affluent clients have between $100k and $1 million in investable assets and it will be important for Schwab to continue to pursue them in order to grow its asset base. Currently, Schwab holds about $120k for its average retail client and has aggressively marketed to this segment.

Schwab continues to make money from trading commissions and, increasingly, asset management by serving two major customer segments: individual investors and independent investment advisors (IAs).

Asset Accumulation

Schwab makes money primarily from two sources: assets and trades. While Schwab has historically been a discount brokerage firm focused on generating revenue from trade commissions, the company has gone through a fundamental shift.[3] This change places Schwab closer to the traditional brokerage firms focused on asset accumulation than the discount brokers that depend heavily on commissions from trade.

Equity Market Volatility

Market volatility and cycles affect Schwab's business as it does all brokerage firms. However, Schwab's shift to asset management allows it to be relatively less exposed to declines in transactions compared pure to discount brokers in case of a slowdown in the equity markets.

Competitive Landscape

Charles Schwab's largest competitors are:

SCHW competes against smaller brokers such as ETFC, AMTD, and RJF.

One recent trend that may have a significant impact on all discount brokers is the entrance of retail banks Bank of America (BAC) and Wells Fargo (WFC), both of which announced fee-free trading in late 2006. While these banks do not have robust trading offerings compared to discount brokers, Bank of America and Wells Fargo have a strong foothold in the financial services marketplace; Bank of America alone has banking relationships with 50 million—or half—of all households in the U.S..


Schwab leads the niche institutional market with its Schwab Advisor Network. Its closest competitors are Fidelity and TD Ameritrade.

References

  1. 1.0 1.1 Charles Schwab 2010 Annual Report
  2. Charles Schwab 4th Quarter Report, 01/19/2010
  3. stock:Charles_Schwab_(SCHW)/Filing/10-K/2010/F46736067#toc19890_28 10-K, Consolidated Statement of Income, page 42
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