If Charles Schwab & Co. has an advantage as it evolves into a competitor to full service financial companies, it may that its customer relationships have afforded it a unique degree of flexibility as it navigates between the worlds of brokerage and banking.
That has given the firm, which is entering yet another phase of reinvention from its roots as a phone-based, no-frills brokerage, the freedom to pick and choose offerings as no bank could. So while Schwab's assault on bank turf includes deals that have added mortgages, trust services and estate planning to its portfolio, don't look for it to match the competition every step of the way.
Listening to customers sometimes means moving in a different direction from the competition, said David S. Pottruck, Schwab's president and co-chief executive officer. For instance, Mr. Pottruck said that Schwab would not follow the lead of brokerages, such as Merrill Lynch & Co., that have stepped into banking with FDIC-insured cash management accounts.
"FDIC money market funds are typically lower yielding than regular money market funds," Mr. Pottruck noted. "Our clients don't typically worry that much about FDIC insurance. They're more tolerant of managed risk. I think, obviously, if they leave a billion dollars of their assets with us, they trust us."
In order to move beyond the discount brokerage model, one where its profit opportunities were becoming limited by increased competition, Schwab has been forced to take several steps in the direction of old-line Wall Street firms.
"Right now we are transforming ourselves from being the world's largest discount and online investing firm into being the new model of full-service investing firm," Mr. Pottruck said, calling the effort, "a huge transformation that I think dwarfs anything we've done in the past."
The customer relationship process is somewhat like the one he describes in his recent book "Clicks and Mortar: Passion Driven Growth in an Internet Driven World," co-written with consultant Terry Pearce.
In the book, he points to examples such as the microwave oven to illustrate Schwab's approach to creating revolutionary products to meet everyday needs. Before the microwave, no one would have asked for an oven that cooks a meal in four minutes by exciting water particles; people just wanted to come home to a hot dinner, Mr. Pottruck wrote.
Schwab answered concerns about service over the Internet and telephone by opening branch offices, even though, the company says, its customers themselves had not realized that they wanted a local human presence.
Now, Mr. Pottruck said, Schwab customers are learning how much they want advice.
In March, Schwab began offering investment advice to its brokerage customers through its branch network and over the telephone. For a $400 fee, Schwab gives its brokerage customers tips on asset allocation and, if necessary, recommends specific equities and mutual funds. Mr. Pottruck, a 15-year Schwab veteran, described the program as a "teach-yourself-to-fish concept" that would help essentially self-directed investors help themselves.
Schwab's "investment specialists" are not meant to replace the 6,000-plus independent financial advisers with which Schwab works. Schwab has referred nearly $8 billion of client assets to fee-based money managers historically and expects to refer $5 billion to $6 billion to them this year alone, Mr. Pottruck said.
Under Mr. Pottruck, Schwab will try to bull past a lot of rivals - including banks as well as the established full-service brokerages. That means expanding the relationships with its customers in a more personal way.
"The next big battleground is clearly help and advice. Online trading has moved from a product differentiater to a utility," said Michael J. Freudenstein, an equities analyst at J.P. Morgan Securities in New York.
Schwab - which has added on average $13 billion in net new assets a month this year - had not been hurt by not offering advice, Mr. Freudenstein said. But with a new breed of investors looking for more sophisticated advice, Schwab's move is a good one, he said.
"They're definitely stretching the brand across a wider base," said Greg Smith, an equities analyst at Chase H&Q in San Francisco. "The big question is, what are they going to do for the average retail customer as far as banking?" Mr. Smith asked.
On that front, Mr. Pottruck said that Schwab would expand into more banking services, though how far remains to be seen. Mr. Pottruck claims not to know, echoing the company mantra that innovations are driven by clients' needs. "It's not about new products and services," he said. "Those are part of the overall scheme of innovation of listening to customers."
But Schwab has edged into other areas of banking already. In April, Schwab struck a partnership with E-Loan Inc., an online lender in Dublin, Calif., which will offer mortgage products through Schwab's Web site.
And Schwab's merger with New York-based U.S. Trust Corp. will allow it to offer trust, estate planning, and private banking services to wealthy clients and give Schwab greater investment research capability, an area in which it has been lacking.
Schwab has also joined the online brokerages Ameritrade Holding Corp. of Omaha and New York-based TD Waterhouse Group Inc., mostly owned by Toronto-Dominion Bank, to form Epoch Capital Partners, an investment bank that will provide shares in initial public offerings to those firms' clients.
At the same time, Mr. Pottruck is careful not to paint the effort as a "Schwab versus Merrill" kind of conflict.
"There's lots of room for the great companies - and the great companies have many different forms," he said.
"The press likes to paint the picture of Schwab and Merrill Lynch in this battle to the bitter death. The truth is there's lots of room for us all to be successful. None of us have the big share of client business," Mr. Pottruck said.
Schwab, of course, is not the only financial services firm reinventing itself. Discount brokerages such as E-Trade Group Inc. in Menlo Park, Calif., and TD Waterhouse Group have added online banking components. And E-Trade plans to add a network of financial advisers by yearend who will make house calls to customers anywhere in the United States.
Companies such as Merrill and J.P. Morgan have introduced Internet-centered accounts and discounted trades in an effort to draw business from a broader customer base.
"The technology budget of Merrill Lynch is almost equal to the entire expense budget of Charles Schwab," he said. "It's humbling to think about the capabilities of these firms that now take us more seriously."
So how does Schwab compete?
"By being a little smaller, maybe we can be more nimble. Maybe teamwork is a little easier when you're smaller," Mr. Pottruck said. "We're not going to win because we have a bigger budget or more resources or can spend more money on things. We're going to win because our focus on customers is more relentless and our focus on teamwork is more relentless."
But Mr. Pottruck clearly sees an advantage to the size his company has amassed. Schwab, which had $775 billion of customer assets at the end of April, dwarves self-styled up-and-comers such as TD Waterhouse, which had $160 billion of customer assets at the end of April.
"Smaller firms with less talent and less resources will never catch up. They erode out of existence, or they merge out of existence."
