SAN FRANCISCO - Has Charles Schwab Corp. finally hit on the business model that will let it reinvent itself for the third time in its short history?
The firm, famed for its fast moves into winning business lines like the OneSource mutual-fund supermarket and online trading, has struggled lately. As online trading sputtered, no new growth engine was primed.
Now, advisory services are shaping up to be the newest hope, targeting high-net-worth individuals and, increasingly, aiming to capitalize on all the bad news coming out of the Wall Street brokerage world these days.
It is probably a good sign for Schwab, given its history, that the service is aimed squarely at a customer segment that has been the mainstay of firms like Merrill Lynch & Co. Indeed, in dubbing the service Schwab Private Client, Schwab uses the same terminology that Merrill uses for its individual customers.
In trumpeting its launch, Schwab joins a fast-growing and diverse roster of financial services companies - from Bank of New York to E-Trade - looking to highlight independent research and advisory services.
Schwab's founder, chairman, and co-chief executive, Charles R. Schwab, said Monday at its annual meeting, "We're opening up a path to 50% of the market we haven't competed in" - a $7 trillion to $8 trillion market that has been the "traditional Merrill Lynch playground.".
"As we look ahead to our new capabilities," Mr. Schwab said, "I believe we are experiencing a new watershed. We're moving from the edges of clients' investing decisions to helping them make them."
Regulators' scrutiny of the research and advice functions following the stock market slide and the Enron scandal has caused big changes at Schwab and several other firms.
E-Trade Group Inc., which has also been transforming itself into a more full-service outfit, announced last week that it would start a global equity research unit serving institutional clients. The Menlo Park, Calif., discount broker said it had been thinking about creating a research unit for the past year and decided that the current environment was perfect for it.
Schwab, which has also applied for a bank charter and will offer a full array of bank products, is emerging from what executives say was the toughest year in its 25 in business. It posted a $13 million fourth-quarter loss and cut its work force by 25% on the year, when its market value fell 46%.
The company has been repositioning for several years, from a discount brokerage that let investors make their own choices to one that has more influence over where its clients put. Since 1995 it has been steering clients to external - though Schwab-affiliated - investment advisers, which now number about 6,000. Schwab Private Client will offer investment advice through its offices across the country and charge fees according to individual customers' assets.
And their clients changing habits show the need for Schwab's makeover. The number of retail investors going it alone and trading stocks online continues to drop. On Monday, Schwab announced that daily volume averaged 192,000 in April, down 6% from this past March and 18% from April of 2001.
Richard Repetto, an analyst with Putnam Lovell Securities in New York, wrote in a research note issued Monday that online trading will probably get slower still in the summer, traditionally a down season for the securities business.
Mr. Schwab said investors "deserve expert advice that is uncomplicated … and delivered by professionals" whose only incentive is to act in the customer's best interest. And co-CEO David Pottruck said Schwab's own focus groups have found that "there is a lot of distrust and disillusion" among investors and that "it's not just because the market is down."
Schwab's upcoming advertising campaign - the print component kicks off Thursday, to be followed by television next week - will allude to Wall Street's past mistreatment of retail investors, Mr. Schwab said.
Meanwhile, Merrill Lynch chairman and CEO David Komansky once again defended the company, reiterating some of the points he made in a contrite statement last month at Merrill's shareholder meeting.
At a Goldman Sachs conference Tuesday in New York, Mr. Komansky told investors that he regretted that some research and communications by Merrill may have seemed dishonest. He also said that he did not expect that the structural changes demanded by the office of New York Attorney General Eliot Spitzer office would give the other big brokerages an edge over his company.
"The attorney general will avoid" creating "a competitive disadvantage to one particular firm," Mr. Komansky said.
Fielding another question, the CEO said that it is "not feasible" to separate research altogether. "Research is an essential part of our business," he said. "I think it is compatible to wall off research without spinning it off."
