Charles Schwab & Co. has bank customers in its sights.

The nation's largest discount brokerage firm, which once catered exclusively to sophisticated investors, has spent the past three years wooing mainstream savers to its fold. Its big drawing card has been its no- fee mutual fund supermarket, dubbed OneSource.

With its emphasis on innovative products and cutting-edge technology, Schwab last year roped in 698,000 new accounts and boosted its customer assets by 48%, to $181.7 billion. Understandably, numbers like those put the company's top executives in a chest-thumping mood.

"Where do you think that money is coming from? Banks. It's coming from banks," David S. Pottruck, Schwab's president and chief operating officer, declared in a recent interview.

Charles R. Schwab, the company's chairman and chief executive, said banks are losing ground to firms like his because they're neither as nimble nor as entrepreneurial as brokerage firms.

"The banks are in a very envious position of being the premier institutions," Mr. Schwab said. But, he added, "their vulnerability is their inability to introduce newer services" at a rapid pace.

Astute bankers are keeping a watchful eye on Schwab's every move.

"Every time one of my clients opens an account at Schwab, or increases the amount of business they do at Schwab, it's a serious competitive threat," said Richard C. Hartnack, vice chairman of Union Bank, San Francisco. "It may not harm my bottom line much yet. But we (bankers) all ought to be concerned about what Schwab is doing."

Chances are the classic Schwab customer - "a self-reliant, aggressive, confident trader," according to Mr. Pottruck - already has a brokerage account. That leaves fledgling investors - like those it has snared from banks - as the next frontier.

Schwab officials said the company's surveys show that only half of new customers had brokerage accounts before they signed up. The average opening balance for a new customer was more than $30,000, according to Perrin H. Long Jr., an independent securities analyst in Darien, Conn.

These new investors have helped make the OneSource program popular. The program, launched in July 1992, offers more than 350 no-load mutual funds, with Schwab providing general investment advice, consolidated account statements, and the ease of one-stop shopping. In turn, Schwab collects a fee of 0.25% to 0.35% of assets from the fund companies that funnel their funds through Schwab.

Executives say the company's focus on up-and-coming investors is an inevitable outgrowth of an ambitious business strategy. Mr. Schwab says he is determined to boost the brokerage's customer base to more than five million within five years, from 3.4 million today, while keeping assets and revenues rising at a lofty 20% a year.

What's more, he plans to accomplish this without sacrificing earnings: he considers 10% after-tax profits the minimum acceptable level. Last year, the company earned $172.6 million, up 28% from 1994.

"The basic business model is very appealing, and Schwab has done a tremendous job of expanding its natural customer base beyond traders," said Guy Moszkowski, an analyst at Sanford C. Bernstein & Co.

But another analyst questioned whether such a torrid pace can be sustained. "The company is much bigger today, so its rate of growth will slow," said Mr. Long. "It's got to."

Mr. Schwab disagrees. "Everyone's in tune with the minimum expectation of 20% per annum growth," Mr. Schwab said.

In its drive to become consumers' preferred financial sanctuary, Schwab is opening branches at a time when many banks are closing them. It added 29 branches in 1995, for a total of 237, and plans to open another 15 to 20 this year.

Though Schwab has fewer branches than most major banks, "we try to do them smarter than the banks," said Tom D. Seip, executive vice president for retail brokerage.

The branch system has proved instrumental in luring new customers. "You absolutely don't need branches for transactions," Mr. Seip explained. "You need them for peace of mind." In other words, branches are where new investors can see who they're giving their money to, and later, where they can go if they need to resolve problems.

More than two-thirds of new accounts and the "great majority of new assets" come through the branches, a Schwab official said. Already 70% of U.S. residents live or work within 10 miles of a Schwab office, he added. The average customer's age is 47.

Unlike traditional bank branches, Schwab's are cheap. They average less than 2,000 square feet and employ no more than seven people. And none has a lease longer than five years, Mr. Seip said.

Once customers have signed with Schwab, the company services customers by telephone, computer, fax - even by pager. Schwab boasts four regional call centers, and handles 60% of calls automatically, either by touch-tone services or through a computer connection.

Schwab once saw banking from the inside. From 1983 to 1987, the company was owned by BankAmerica Corp., in a landmark deal that made Schwab the first discount brokerage to be affiliated with a bank. It was sold back to Mr. Schwab for $280 million when financial woes stemming from loan losses prompted BankAmerica to downsize.

Company executives are convinced the brokerage wouldn't have been able to thrive for long in a bank setting. Legal and regulatory barriers would have hindered the buildup in mutual funds that has been central to the company's recent growth, Mr. Schwab said. He also pointed to cultural problems with bank ownership.

"I've seen a lot of banks start up little discount brokerage things, but they've always had lots of problems because they've been the stepchild to the institution," Mr. Schwab said.

Now, 45% of Schwab's stock is owned by company employees. That has made a tremendous difference in employee retention and motivation, according to Mr. Pottruck. "In the 12 years I've been here not one vice president or above has ever quit to go to work for another financial institution - ever," he said.

Schwab's efforts to outmaneuver the banks doesn't end with the pursuit of retail customers. The company is getting ready to horn in on another big business of banks' - 401(k) retirement plans.

"We are increasing our focus on the 401(k) arena as fast as we can and as dramatically as we can," said Mr. Pottruck. "We want to be one of the top five players in the 401(k) business in five years."

That would require Schwab to take 401(k) assets from approximately $5 billion today to more than $50 billion. Schwab officials admit the goal is ambitious, even for them. But high goals and plenty of competition have spurred the company before.

"Anybody can walk in here today and say 'I want my money,' and we give them their money and they're out the door," Mr. Pottruck said. "That kind of fear, that kind of lack of comfort, keeps us on our toes every single day."

Bankers aren't buying Schwab's worries.

"If they've got a flaw, I don't know what it is," said Union Bank's Mr. Hartnack. "I think they'd be successful if they were selling mops."

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