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Thursday, June 28, 2012

Charles Schwab Future Strategies


Charles Schwab Future Strategies
Greg Morris and Hiu Fung Tse









MET AD 741 – Team Research Paper
June 17, 2012

Abstract
This paper proposes new directions to what the Charles Schwab organization should take as it moves into the second decade of this millennium. The paper first analyzes external business environmental changes in the past decades. This includes market segmentation changes, change basis of competitions, change in fee and services. Then the paper proposes some high level strategies Charles Schwab should take to adopt the changes to push the business forward. Strategies include: 1) Enable Direct Investors – Target Market to Youth and Self Serve Nature; 2) Reduce Fees to Adopt the Elastic Market; 3) Mobile Technology for Independent investors; 4) Mergers and Acquisitions to Extend Technology Platform and Integrate Platform to New Market Segment; and 5) Scaling Customer to Fine Tune Differentiation Among Different Customer Classes.  By adjusting and fine tuning its business model, according to the proposed strategies using an innovation process and marketing concepts, we are looking forward to seeing Charles Schwab face challenges and dynamic market shifts in the second decade of the millennium.









Market segment analysis introduction
Charles Schwab showed great innovation and growth in the prior few decades in the financial investor market segment.  When a large market share was controlled, around 2002, Charles Schwab started to squeeze its less wealthy clients by raising fees and transaction charges on smaller-sized accounts. This caused some customers to defect to discount brokerages such as Ameritrade, E*Trade and TD Waterhouse that had grown up during the dotcom boom. Indeed, there had been tremendous growth and consolidation among the discount broker segment. In just the fourth quarter of 2005, mergers in the discount broker segment affected 3 million accounts and nearly half a trillion dollars in assets.  Competitors were becoming better able to compete with fully services firms.  Charles Schwab was facing more formidable competition especially at the discount transaction-oriented customer segment. (Barnett and Mauldin, 2006)
Change in market behaviour and competition basis
The most significant change to occur at Charles Schwab over the past few years was its source of revenues. In 2000, 50% of Charles Schwab’s revenue came from trading activities and 27% from asset-based fees. Things changed by 2005 and by that time, 79% of Charles Schwab’s revenue was derived from asset based products/services and interest. Only 17% came from trading revenues. The shift away from dependence upon trading revenue allowed the company to drop its trading commissions.  This is a positive trend for Charles Schwab because the market is changing.

Change in Fees for Services
In 2012, the Financial Services Authority will be banning the paying of commission to giving advice.  The financial advisors would have to develop a few schedules that would be directly related with the investors (Ross, 2009).  This does remove expenses that Charles Schwab would have to pay for commission allowing them to further lower the prices of the of the trading activities.  However, there is a downside because the financial investors will now be independent.  Also, with the most stringent qualifications that will be required the Ernst & Young is expected the 35,000 advisors to shrink to 20,000 (Ross, 2009).  Because the fees are being passed directly to the consumers, some customers will refuse and want to buy direct from the financial institution.  Charles Schwab will need to make this process as painless as possible.   

Strategy 1 Enable Direct Investors – Target Market to Youth and Self Serve Nature
Pure self-directed investing is "a very teeny market”. The key to this company's continued growth, and to really becoming finances Wal-Mart, is to get people to think of Charles Schwab as the best place to go for investment expertise.  Since fees are being changed on the advisor side, Charles Schwab wants to make sure the fee structure is simple and transparent.  Also some of the customers will not want to pay advisor fees and will become direct investors.  In the time of change, Charles Schwab will need to build a trust with their clients (Warwick-Ching, 2009).  When the financial recession occurred clients began to pay more attention to the charged fees.  A straight forward schedule that clients can understand will help build a comfort level with clients and invest directly without an advisor.  Working with the self service customers a target market will need to be validated with market research.  The trends of this market and competitor offerings will need to be examined.  Charles Schwab will want to not only meet the basic needs but also the unstated customer needs (Leybourne, 2012, Lecture 5).  With the shift in market, Charles Schwab will want to base their basis of competition on convenience to the consumer (Leybourne, 2012, Lecture 3)

Fidelity has been able to grow to one of the biggest 401k administrators.  401k investors are commonly direct investors and this market is a large potential growth sector for Charles Schwab.  The reason for this growth was because customers get access from their employers.  Charles Schwab will want to work on getting access to these companies and overtake the large competitor.  The employees that would be given access will be direct investors.  A number of these investors will be younger and would start with smaller sums of funds but it will prove profitable with a large number of individual investors (Gibbs, 2010).  Charles Schwab has begun work on these products but will need to continue to innovate to obtain these low maintenance direct customers.   

Strategy 2 Fees to Adopt to Elastic Market
However, some customers will not come direct.  To better compete in this segment of business Charles Schwab completely revised their approach, cutting trading fees on average by over 50%.  Trading commissions continued to be a shaky source of revenue in the industry; for example, in October 2006, Bank of America began offering free trading to customers who kept a minimum balance of $25,000 in combined checking, savings or CD accounts at the bank (Bank of America).   With the clear fee schedule being instituted, Charles Schwab should consider a flat charge and introduce performance related fees.  Performance related fees would be harder for existing companies to develop as the cost base and could lead to competition from start-ups (Warwick-Ching, 2009).  Charles Schwab will need to have agile and not fear the change of acting like a start-up.  By using this technique, Charles Schwab will be able to focus on not only maintaining their market share but also finding growth opportunities within the market (Adams, 2002).  With starting this structure now, Charles Schwab would be ahead of the competition.  The performance related fees would be difficult to institute but would clients may be more comfortable with fees when they are outperforming the expected return.  Similar fees have historically been used in hedge funds (Vincent, 2009).  With advisor fees and flat charges likely becoming the norm in the industry, performance fees would create a new revenue stream that would be a win/win for both parties.  Charles Schwab will need to work closely with their funds to develop fair benchmarks for the expected returns. 

Strategy 3 Mobile Technology for Independent investors
There are new enhancements in technology to help support the businesses of independent registered investment advisors (RIAs). Among the enhancements available for advisors to view at IMPACT, an annual financial industry conference, is a new workflow library that is to be a key part of the Schwab Intelligent Integration initiative.  Schwab Intelligent Technologies™, a subsidiary of The Charles Schwab Corporation, is also announcing a new relationship with independent software vendor (ISV) Salentica, which will increase the number of RIA firms that can benefit from Schwab Intelligent Integration.

The focus on technology continues with other new online capabilities on display at the conference including Charles Schwab’s upcoming mobile application for the iPhone™ and enhancements to the Schwab Alliance web site that supports clients of advisors who custody assets with Schwab Advisor Services (BusinessWire, 2011).  In 2011, the World Economic Forum concluded there were only about 10% of adult that used mobile financial services and those were primarily payments (2011).  There is a large amount of growth with the segment and the alliances with the mobile partners will allow Charles Schwab to continue to be the innovators of integrating technology with the products.  Finding new technological methods of integration can also extend the life cycle.  As the mobile devices are used it will start with the early adopters before having mass market acceptance (Moore, 1995). 

Strategy 4 Mergers and Acquisitions to Extend Technology Platform and Integrate Platform to New Market Segments

Sometimes organizations cannot do everything themselves, and there is an argument that maybe they shouldn't. Historically, there has been a growing trend towards a focus on what you are good at, and getting others to do the other stuff.

From Charles Schwab perspectives, there are two directions for mergers and acquisitions. One is to extend their technology platform through acquiring companies with new trading technologies.  The other is acquiring companies that have different business trading market and integrate their technology platform into Charles Schwab’s businesses.  This allows Charles Schwab to have a collaborative network that lets the each part focus on what they do best.  It allows a synergistic alliance that is more valuable as a complete product (Leybourne, 2012, Lecture 4).  The following approaches are a start to help with the other strategies.

Extending Technologies Platform

In March 2000, Charles Schwab acquired CyberCorp and its subsidiary CyberTrader, a fast-growing online brokerage with specialized electronic trading technology for highly active traders. Also in 2000, Charles Schwab acquired the Chicago-based firm, Chicago Investment Analytics, which developed proprietary stock analysis based on quantitative modeling techniques for institutional clients.

Integrating Technologies Platform into new market Segment
In January 2000, Charles Schwab announced an all-equity deal valued at approximately $2.8 billion to acquire the venerable U.S. Trust. Charles Schwab’s management hoped to leverage the company’s IT assets with U.S. Trust’s high-touch, high-margin relationships. (Burgelman and Meza, 2008)

In January 2004, Charles Schwab paid approximately $340 million to purchase SoundView Technology Group, an equity research firm.  Charles Schwab combined SoundView with automated trading technology and market-making functions previously developed by Charles Schwab to create a combined institutional research and trading capacity (Burgelman and Meza, 2008)

These two trends will continue in the second decade. Charles Schwab needs to determine what kind of technologies they would need to acquire that would enhance their user trading experience.  These synergistic alliances allow the companies to align their strategies. On the other hand, Charles Schwab needs to determine if there is some potential existing high value trading markets that have not been computerized. 

Strategy 5 Scaling Customer to Fine Tune Differentiation Among Different Customer Classes
Charles Schwab representatives were able to offer investors personal advice. Smaller investors with up to $50,000 to invest generally received mass advice, making use of investment tools that were online or otherwise easily scalable. For Charles Schwab retail, that sweet spot was customers with investible assets between $50,000 and $2 million. Accounts with more than $250,000 were assigned a relationship manager.

One key challenge Charles Schwab faced was efficiently and effectively serving clients with less than a quarter of a million dollars in their accounts. The company wanted these customers to feel they were being serviced well and serviced by the firm without the need of an individual representative. This was important because in the investment industry, sales representatives and other financial planners often took some or all of their clients with them when they switched firms or opened up their own investment management practices.
For all of Charles Schwab’s investments in technology and scalable investment platforms, its physical network of branches remained an important part of the business. Most of Charles Schwab’s new assets came in through the branches. The physical locations were important to customers; even younger customers seemed reassured by the physical branches (Burgelman and Meza, 2008).

Conclusion
Charles Schwab has been an innovator for the last couple decades.  The product offering is marketed different but the complete investment product is still similar.  Charles Schwab is finding new ways to bring sustaining technology instead of disruptive technology to the market (Leybourne, 2012, Lecture 2).  As the financial industry, especially fees change Charles Schwab will want to stay on the forefront of the technology and other product offerings.  To stay ahead in the future Charles Schwab will need to increase the number of direct investors and see the potential of the youth market.  There will also need to be a change the fee structure and they should consider performance fees as the market has become more elastic. Increased use of mobile technology, continued trend of acquisitions, and scaled services for the different customers are additional strategies that will be needed to keep a future competitive edge.  With the strategies, Charles Schwab will provide services that will allow them to grow and build a trust with customers.  

















References:
(2006). Bank of America press release - “$0 Online Equity Trades are Coming Soon”. Retrived from http://www.bankofamerica.com/investing/index.cfm

(2011, November 2). Schwab Talks Technology for Independent Investment Advisors at Annual Conference. BusinssWire. Retrieved from http://www.businesswire.com/news/home/20111102006291/en/Schwab-Talks-Technology-Independent-Investment-Advisors-Annual

(2011). The Mobile Financial Services Development Report 2011. World Economic Forum. Retrieved from http://www.scribd.com/doc/55337266/The-Mobile-Financial-Services-Development-Report-2011

Adams, R. (2002). Big Companies need to Act more like Start-Ups. A Good Hard Kick in the Ass: Basic Training for Entrepreneurs. (pp.237-263). New York: Random House/Crown Business.

Barnett, Megan and Mauldin, William. (2006, July 11). The Right Broker for You. Smart Money. Retrieved from http://www.smartmoney.com/invest/markets/the-right-broker-for-you-19754/

Burgelman, Robert and Meza, Philip. (2008, January 3). The Charles Schwab Corporation in 2007: Fixing and Redefining the Core Business. Harvard Business Review. Retrieved from http://hbr.org/product/the-charles-schwab-corporation-in-2007-fixing-and-/an/SM35C-PDF-ENG

Gibbs, Lisa. (2010, January 14). Charles Schwab is selling advice. Should you take it?.
CNN Money. Retrieved from http://money.cnn.com/2010/01/14/pf/charles_schwab.moneymag/

Leybourne, Steve. (2012). Lecture 2 – Types of Innovation, and their Organizational and Market Challenges. Boston University. Retrieved from http://vista.bu.edu/webct/urw/tp0.lc5116011/cobaltMainFrame.dowebct

Leybourne, Steve. (2012). Lecture 3 – Innovation as Value Creation: Understanding the Basis of Competition. Boston University. Retrieved from http://vista.bu.edu/webct/urw/tp0.lc5116011/cobaltMainFrame.dowebct

Leybourne, Steve. (2012). Lecture 4 – Alliances and Partnerships as a Way to Add Value to Products and Services.  Boston University. Retrieved from http://vista.bu.edu/webct/urw/tp0.lc5116011/cobaltMainFrame.dowebct

Leybourne, Steve. (2012). Lecture 5 – Using Market Research Techniques to Add Value.  Boston University. Retrieved from http://vista.bu.edu/webct/urw/tp0.lc5116011/cobaltMainFrame.dowebct

Moore, G.A. (1995). Crossing the Chasm - And Beyond. Inside the Tornado Harper Business Essentials. p. 13-26.

Ross, Alice (2009, October 16). Investors set to pay more for advice. Financial Times. Retrieved from http://www.ft.com/intl/cms/s/2/b3d423ce-ba81-11de-9dd7-00144feab49a.html#axzz1x9uyXwbu

Vincent, Matthew. (2009, October 16). Fees shake-up will result in extra sums. Financial Times. Retrieved from http://www.ft.com/intl/cms/s/2/949c01d8-ba78-11de-9dd7-00144feab49a.html#axzz1x9uyXwbu

Warwick-Ching, Lucy. (2009, October 16). Wealth management under fire. Financial Times. Retrieved from http://www.ft.com/intl/cms/s/2/267c8dee-ba82-11de-9dd7-00144feab49a.html


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