Every time banks react to a Charles Schwab & Co. product or service, it seems the discount broker comes up with something new-or a new way to market something old.
Banks have finally put up their own so-called supermarkets for no-fee mutual funds to compete against Schwab's wildly popular OneSource. Now they must contend with a new, high-end Schwab program: one that links clients with private institutional money managers from top-rung firms.
After years of courting the mass-market investor, Schwab is going after brokerages and banks for their most affluent customers-institutions and high-net-worth clients.
"There's no question they're all competing for investment adviser business," said William G. Hart, principal of Hartline Investment Corp., Chicago. "It's lucrative, and the demographics look good."
Last week, the San Francisco-based discounter retooled a program to give more investors access to private money managers, including those at elite firms like Lazard Freres Asset Management. Schwab reduced the fees for people with less than $250,000 to invest.
Some say Schwab has its sights set on competitors like Merrill Lynch & Co., American Express Co., and even rival fund supermarket Fidelity Brokerage Services. (For now, Schwab is outdoing Fidelity in the institutional market, while Fidelity leads Schwab in the booming 401(k) business.)
"A lot of people" view Schwab "as a very powerful Goliath, still in the early stages of development" of its institutional business, said Goldman, Sachs & Co. analyst Richard K. Strauss. (See chart.)
From Wall Street to Walla Walla, the discounter has garnered an intangible: buzz. It's a hot company. Brokerages emulate it. Investors pump it full of cash. Even the media have given it favorable attention.
Indeed, press reports last week played up Schwab's repricing of its money manager program as the launching of a new business. But in fact, the discounter had been quietly targeting wealthier clients for several years.
"It's a new pricing structure, not a new arrangement," said Glen Mathison, a Schwab spokesman who said the discounter's joint-venture partner, Denver-based Portfolio Management Consultants Inc., had released information on the program.
Regardless, Schwab came up smelling like a rose.
"That's the irony," said Mr. Mathison.
Schwab is widely credited with educating the lay investor about mutual funds as about 76 million baby boomers build up their retirement savings. Schwab pioneered the mutual fund supermarket, and it has forced competitors to reconsider pricing and offer funds without up-front or annual fees. (With more than 1,000 funds, another discounter, Jack White, has far surpassed Schwab in sheer fund choice.)
Schwab is "driving the retail business at brokerages and banks," said Burton J. Greenwald, a consultant at B.J. Greenwald & Associates, Philadelphia. "Everyone from NationsBank on down is moving toward supermarkets, or they know they're going to lose business."
In an effort to cash in on Schwab's cachet, two banking companies- Cleveland-based KeyCorp and First Union Corp., Charlotte, N.C.-recently started giving customers access to OneSource.
Schwab "continues to increase its share in virtually all of its key businesses," according to a Goldman Sachs research report touting the discounter's stock, which is traded on the New York Stock Exchange. The stock, like those of many financial services companies, has recently traded at or near its 52-week high of $42.
Schwab controlled 14% of the market for direct-marketed funds in 1995, up from 11% the previous year, Goldman Sachs said.
The discounter managed 4.8 million investor accounts totaling $253 billion at yearend 1996. Its OneSource line offers a vast selection of mutual funds with no sales load and no transaction fees. And while OneSource is available through private money managers, Schwab's bread and butter remains its small investors, who can set up a portfolio for as little as $1,000.
Schwab prides itself on thinking fast and making changes efficiently. David Pottruck, president and chief operating officer, likens this to changing tires on a car going 90 miles an hour.
Not all of its ideas are original, though.
Indeed, Mr. Pottruck credited a banker-a former Citibank colleague, Richard M. Kovacevich, now CEO of Norwest Corp., Minneapolis-with influencing the retail philosophy that guides Schwab. Mr. Kovacevich, Mr. Pottruck has said, may have been the first banker to use the terms "same- store sales," "product velocity," and "direct marketing."
"If I taught him anything, the teacher has now become the student," Mr. Kovacevich said. "I'm trying to learn from Dave how he so successfully markets investments to a large customer base."
Schwab also created a version of Merrill Lynch & Co.'s cash management account-an all-in-one checking, credit card, and securities account, said Raphael Soifer, a bank analyst at Brown Brothers, Harriman & Co.
"Merrill Lynch started it," Mr. Soifer said, but Schwab "brought it into the discount brokerage. Schwab is a very well-regarded firm. They've done a lot of things right."
Often, Schwab has succeeded by reacting quickly to the market. In August, for example, Cincinnati-based Star Banc Corp. announced it would buy airline tickets for its proprietary mutual fund customers. A day later, Schwab said it would award bonus miles to Delta Airlines frequent fliers who moved their financial assets to the firm.
"I have tremendous respect for what Charles Schwab has accomplished," said Daniel A. Saklad, executive vice president at Norwest. "They and Fidelity have been a wakeup call to the financial services industry-bank brokerages, brokerages, and insurance companies."
"Schwab's technology," Mr. Saklad continued, "has given them the ability to build customer data bases and get timely information to consumers. You do have to build that."
Indeed, Mr. Hart of Hartline Investment praised the SchwabLink software for advisers.
"I know to the penny what I have in each account-what the balance is- every morning," he said. "With a lot of companies, you would have to call every day for the same information, or get it at the end of the month."
Schwab is not infallible, Mr. Soifer said. Without greater sales and research help, it cannot threaten the major brokerage houses' institutional business.
And Joel Calvo, president and CEO of PNC Brokerage in Pittsburgh, argued that Schwab's "do-it-yourself" approach to buying funds only works well in a thriving stock market.
"With more volatility, more people will want advice" from their broker, Mr. Calvo said. "For them to grow, they will have to develop a sales- assisted area."
But some think Schwab's name alone will make it a player in chosen businesses.
"They've done an enormously successful job of creating brand recognition," said Mr. Greenwald, the Philadelphia consultant. "They've done it as well as American Express, Merrill Lynch, and others that have been around a lot longer."