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.
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