Charles Schwab Corp - Schwab Continued To Redefine Itself, 2000-2001

SCHWAB CONTINUED TO REDEFINE ITSELF (2000-2001)

In February 2000 Schwab announced it would acquire CyBerCorp. Inc., a closely held electronic trading technology and brokerage firm based in Austin, Texas, for about $488 million. The acquisition was designed to enhance services offered to very active traders. CyBerCorp., which would operate as a subsidiary, allowed traders to scan multiple electronic communications networks, market makers, and market specialists for the best prices and then place orders. The company also provided customers with streaming quotes and news. To further attract very active traders, Schwab announced it would reduce fees to $19.95 per trade once a customer made more than 30 trades in a quarter. The fee would be further reduced to $14.95 per trade once a customer exceeded 60 trades in a quarter. Analysts noted that the new fee structure, along with the acquisition of CyBerCorp., made Schwab more appealing to day traders.

Schwab's largest acquisition of the year was U.S. Trust Corp., which Schwab acquired in June 2000 in a stock swap valued at $2.7 billion. The two companies would each retain their separate brand identities. U.S. Trust Corp. offered personalized asset management services, primarily to wealthy clients. Its minimum account balance was $400,000. The acquisition was notable in several respects, one being that it required the approval of the Federal Reserve Board. In order to complete the transaction Schwab had to apply to the Federal Reserve Board to become a bank holding company, and then convert to a financial holding company. It was the first financial conglomerate created under the Gramm-Leach-Bliley Act, which eased restrictions on the combination of securities firms, banks, and insurers. The combined companies would have client assets totaling $913 billion and net revenue of $4.5 billion. By August 2000 Schwab's client assets surpassed $1 trillion, then fell to $961 billion in September and $944 billion in October.

A significant segment of Schwab's client assets consisted of advisor-managed accounts, which accounted for $243 billion of Schwab's $944 billion in client assets in October 2000. Some 6,000 independent investment advisors used Schwab for trading and custody of their clients' investments. The acquisition of U.S. Trust enabled Schwab to further promote the use of its services by independent investment advisors by offering them access to U.S. Trust's administrative trustee services. In addition, Schwab gave them access to U.S. Trust research and Webcasts with U.S. Trust analysts. Later in the year Schwab acquired Chicago Investment Analytics Inc., which produced software to select securities based on quantitative analysis. Following the acquisition Schwab made Chicago Investment Analytics' investment tools available to the independent investment advisors who used Schwab for trading and custody. An annual fee of $8,000 was required to become part of Schwab's program for independent investment advisors.

Throughout 2000 Schwab continued to automate as many processes as possible to reduce costs. For investment advisors, Schwab gave them access to external markets, not only through CyBerCorp.'s systems and high-speed connectivity, but also through an extranet that provided access to resources that enabled them to automate many paper-based functions. At its Web site Schwab introduced features that allowed customers to automate processes such as funds transfers and password changes, which previously required a phone call or visit to a branch office. Schwab estimated that bringing these functions online saved at least $50 million a year in costs, and that its Web site was handling the equivalent volume of three or four call centers. Even as Schwab automated more functions and encouraged its customers to use its Web site, the company continued to expand its branch office network. Some 50 new branch offices were opened between June 1999 and June 2000, for a total of 356 offices. A company spokesperson told InternetWeek, "We do 88 percent of our trades online, but 70 percent of our accounts are opened at a branch office."