May Day
May 1, 1975
May Day - the
day when fixed brokerage commissions were abolished—marked a crossroads
for the U.S. securities industry and created the conditions for Charles
Schwab & Co. Most brokerage firms responded to deregulation by cutting
their commissions rates for institutional investors and raising them
for the average investor. Schwab chose a different course.
Every
story organizes the collision of random events into an opportunity for
learning. So it has been from time immemorial. Every story points
to a beginning before which there was chaos. “Once upon a time” the
most memorable stories begin, demanding that the story teller assign
a marker to separate the now from then, the light from the dark. So
it is with the Schwab story.
We have a number
of dates that will serve. Shall we start with 1937, the year not only
of Chuck Schwab’s birth, but a reasonable marker for the end of the worst
of the Great Depression and the start of the economic expansion that
created, after World War II, the prosperous middle class that would fuel
the company that Schwab was to found?
Maybe a better date
is 1963. It’s the midpoint of the era we now call the Go Go Years, a
period when the stock market threw off the predictability of the 1950s
and danced the Hullabaloo. For the first time, trading stocks became
sexy and young brokers could grow facial hair and show their faces at
the Cheetah and other discothèques. Advisory investment newsletters
were the rage in those Go-Go Years, and, not to disappoint, Chuck launched
Investment Indicator.
Chuck wanted to
be a player. Motivated by the combined desire for professional respect
and personal wealth, Chuck aspired to join the new breed of mutual fund
portfolio managers. The superstars of this elite circle were consistently
outperforming the market averages, racking up gains of 30-40 percent
for their investors. Everybody loved them and Chuck wanted to be a superstar,
too. That’s why he created one of the first no-load mutual funds. He
called the fund Investment Indicators and it soon became the largest
mutual fund in California, with $20 million in assets.
In 1971, Chuck established
First Commander Corporation, his first brokerage. The problem was that
he had an inherent problem with the way the brokerage industry compensates
its stockbrokers. Here are the facts he had to contend with: Stockbrokers
are nothing more than salespeople. They are compensated based on commissions.
Commissions are a benefit only to the brokers and their firms. It follows
that commissions are a detriment to the customer. Brokers earn commissions
only when then persuade a customer to make a trade. That would be bad
enough but it gets worse. Customers think they can rely on brokers for
advice. That’s a clear conflict of interest. To aggravate the matter
further, brokerage firms have a commission structure that rewards brokers
to sell the riskiest investments. The riskier the investment, the higher
the broker’s commission, and the greater the incentive for the broker
to adjust his advice.
Chuck considered
all the commissions, front-end loads, margin interest, markups, fees
and other “impairments of capital” as conspiracies against the public.
He swore eternal hostility to every form of swindle of investors. Being
a traditional stockbroker required selling as well as giving advice,
and Chuck was constitutionally averse to both. Chuck decided to regroup.
Maybe the better date to start the story, then, is 1973, when Chuck renamed
the company to Charles Schwab & Co, Inc. and floundered around, waiting
for an opportunity to present itself.
That opportunity
came on May 1, 1975 and on this date we can reliably pin the beginnings
of the Schwab Story.
