Charles Schwab's decision to replace David Pottruck as its CEO is, at its heart, an ironic statement on the firm's commitment to his business philosophy. Pottruck, who spent nearly 20 years with the firm, is legendary for his impassioned preaching about the need for reinvention, the importance of shaking things up. He aimed to turn the company from a discount broker into an operation that could serve all kinds of customers, ranging from do-it-yourselfers with limited budgets to wealthy families requiring complicated estate planning and constant hand-holding. Under his guidance, Schwab also moved into other noncore businesses, such as trading and buying SoundView Technology Group, the small stock-research firm.
But the Schwab board apparently ran out of patience with this project, dismissing Pottruck on a day when the discount broker reported an earnings decline for the second quarter. In essence, it chose radical change over staying the course.
Such courage has never been in short supply at Schwab. The company was founded in the 1970s by Charles Schwab, who aimed to capitalize on the deregulation of brokerage commissions. In the succeeding years, Schwab changed the way investors bought mutual funds and traded via the Internet.
Pottruck was a large part of the firm's rise and fall in 1990s, when its fortunes tracked Internet trading volume. In 1998, he was promoted to co-chief executive, serving as Chuck Schwab's partner. When daytrading volume tailed off, Pottruck and Schwab scrambled to change the firm's business model. Do-it-yourselfers were becoming an endangered species, the pair concluded. To reach the wealthy, Schwab purchased U.S. Trust, an old-line money manager. (SoundView and U.S. Trust both are likely to be sold, observers say.)
More recently, the broker introduced a stock-rating system and a private client business where customers could pay to meet face-to-face with an advisor. As Pottruck pushed the firm to offer more service, he also took aim at the rock-bottom discounters, announcing that Schwab's best customers could get trades at $9.95, down from $29.95. In effect, he was waging war on all fronts, targeting Ameritrade with low commissions and Merrill Lynch with advice and stock ratings.
He would surely have kept his job if his effort had yielded stellar profits. But the results so far have been lackluster. Earnings dropped 10 percent in the second quarter, and while shares of some discount brokers climbed along with the markets last year, Schwab's stock stagnated. Client assets rose 18 percent in the 12 months ending in June — an uninspiring showing in a period when the S&P 500 climbed 18.9 percent.
If anyone can get the company to bounce back, it is Charles Schwab, who has replaced Pottruck. But the task of reinvention is not a simple one. To compete with the deep discounters, Schwab must offer bare-bones services; to match the full-service brokers, it will have to provide the kind of advice that will attract picky clients.
If Charles Schwab cannot soon deliver on its goal of reaching all kinds of customers, then perhaps the board will insist on another change, this time moving the company back to its model of the 1990s, when Schwab was clearly a discount broker. The formula proved a winner then, and perhaps something like it can work for Schwab again.
