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Schwab’s Performance & Strategies – Current and Future
Schwab’s shift in the value discipline from operational excellence to customer intimacy is not yet complete. While in transition, there is confusion among Schwab’s fee-based advisor network as to what is their role and how do they fit within Schwab’s strategy to attract affluent customers with personal services. Simultaneously, there is a large amount of distrust by individual investors of anyone connected to Wall Street that has caused online trading to decline, which also has decreased revenues from commission-based transactions.
The Schwab Private Client offering to wealthy customers falls short of providing the services that these individuals may expect from an advisor, i.e. the advisor would provide legal, tax and estate-planning advice. Individuals who are attracted to this service offering may still be labeled “unknowledgeable investor” that require a certain degree of hand-holding and are willing to pay for only part of the whole package that a financial advisor would provide. The knowledgeable, wealthy investor would seek services provided by money management firms that provide all the services for an asset-based fee.
Online tools like the Schwab Equity Ratings system provides an objective rating to individual stocks whose market capitalization is greater than $75 million; but small-cap equities below $ 75 million are not rated; yet offer a higher expected return. Also, the individual investor has no more knowledge than his peer of what a change in the “grade” of an individual stock (up or down) indicates in the short-run. In the short-run, this rating system may cause more variability among individual stocks that are sensitive to macroeconomic and/or political shocks that have been occurring during the last 24 months.
In the future banks will compete for the same customers as Schwab. Also, some percentage of customers will value having all the services available to them on one account; which may include banking services. In this respect, Schwab should consider rounding out services by offering banking and insurance products to service those customers that value having these services available alongside investment services.
Our advice to Mr. Pottruck is to segregate the brands that Schwab has acquired to appropriately segment its customers between affluent and non-affluent. They can do this by expanding upon the U.S. Trust brand with those “less affluent” customers with $500,000 or more in assets by providing scaled services based on a fee structure and the needs of the customer. The incentive/fee structure between Schwab and the independent advisor may need to be modified when a customer switches from the independent advisor to U.S. Trust. For non-affluent customers, bundle individual services through the use of the web, telephone and cellular communication devices.
Evolving value discipline can cause disruption and confusion within the network of entities surrounding the firm that is transforming. Having a clear, strategic vision of the end-point goal, combined with an honest appraisal of the capacity requirements to deliver the vision is paramount. The role of IT within Schwab is an enabler to achieve the customer intimacy value discipline. This depends on how closely the firm can align the needs of the customer with the technology that it currently uses or can develop as demand evolves.
To meet this change in the customer, Schwab leveraged its Information Technology (IT) and provided tools that the new investor could use to obtain information for assessing their financial goals and develop a portfolio to meet those goals. While developing these tools, Schwab learned that different customers required different levels of service and were willing to pay for these added services.
This development transitioned Schwab’s value discipline to focus on “Customer Intimacy.” Firms who embrace the customer intimacy value discipline view the customer as having a lifetime value to the company and employees strive to delight the customer. The following phrases extracted from the case, highlighted the endeavor that may yet be realized:
“The ability for customers to select their channel, whether they are placing a trade or seeking information, is core to Schwab’s value proposition”
“Schwab held thousands of online investing seminars a year….for customers not comfortable with Internet technology. Schwab revamped its branch network, replacing teller-like counters by desks and private conference areas fro meeting with customers.”
“Schwab made premium services available to customers. Its Signature Services program offered tiered services for investors who had more than $ 100,000 in assets or traded more than 12 times a year. Signature clients did not get personal brokers, but each was assigned to a small team in one of the call centers. These teams helped clients develop an investment strategy and gave them special treatment…”
Schwab’s sophisticated development environment and state-of-the-art tools embody its innate product leadership qualities. By having a corporate structure emphasizing the strategic importance of IT, the firm is able to introduce products that met market needs while satisfying its corporate objectives. Schwab’s philosophy of “buy tools, build applications” further reflects its no-nonsense approach to providing technological innovation and introducing cutting edge service. The article also described how Schwab quickly responded to the demand generated by the Internet by creating its Electronic Brokerage Enterprise and providing the “Total Customer Access Promise” to ensure connection to the brokerage firm at all times.
The table in Appendix I provides a summary of the key functionalities from the web sites for Schwab.com, E*Trade.com, Ameritrade.com and Merrill Lynch using the investment cycle per the Stanford case and other meaningful business model elements.
Both Schwab and Merrill Lynch provide services to their customers for each step of the investment cycle as described in the Stanford case entitled: “The Charles Schwab corporation.” The level of service depends on the amount of assets owned by the customer and the frequency of trades that the customer is expected to execute during the year. Personal advisors are used extensively for the most affluent, i.e. assets in excess of $2 million. Customers with less than $2 million will still have a personal advisor from Merrill Lynch, but may have an independent advisor through Schwab’s RAI network.
Among the four firms, both E*Trade and Ameritrade are similar in that they provide a means for a knowledgeable investor to place orders to buy or sell financial instruments in an open market. Both E*Trade and Ameritrade appear to pursue customers that value execution of orders and account maintenance with limited information via market news, real-time quotes and streaming video. Little or no information or decision support is provided to the customers for developing the investor’s financial goals, portfolio strategy or tactics to attain these goals. Although E*Trade provides access to 3rd party personal financial planners and an asset allocation tool as a fee-based service. This allows investors to make their own investing decisions as well as seek investment advice if it is necessary.
Appendix II provides select screen snapshots from each of these firms that provide a description of what is their business model and what customers they are seeking via the product or service offerings. Based on the four websites that were reviewed, E*Trade has the most user-friendly features for the online investor. The main page shows most of the products and services offered by the company.