A new book is not afraid to criticize Charles Schwab

By Paul Taylor
Financial Times; Nov 08, 2002

In 1975 Charles Schwab seized the opportunity created by abolition of fixed brokerage commissions in the US and took on the big guns of Wall Street by delivering a low-cost brokerage service to ordinary investors.

Since then, the company that bears his name has grown into one of America's most influential financial institutions, holding more than $850bn in client assets and nearly 8m active accounts.

In a sharp, sometimes brutal and frequently entertaining book, John Kador shows how Schwab evolved from a small discount brokerage firm through "four wrenching upheavals" that would have destroyed many other companies..

His book gives excellent insight into the internal workings of Schwab the company and Schwab the man. One chapter is devoted to the life and career of Chuck Schwab, a middle-class Californian who struggled through Stanford and only realised he was dyslexic when his eight-year-old son was diagnosed with it 30 years later.

The book does not shrink from detailing Schwab's failures as well as its successes. One chapter tells the story of how he allowed one Hong Kong customer to expose the company to more than $120m in liabilities.

The company has failed to make real inroads into international markets outside the Americas but Mr Kador identifies the company's - and the man's - biggest failing as its lack of a succession policy, with Mr Kador laying the blame for this squarely at Chuck Schwab's door.

Mr Kador notes the company was founded on three fundamentals - no advice, no cold calling and no commission-paid brokers. Yet at a time when confidence in many Wall Street institutions has been shaken, Schwab is "systematically abandoning the principles on which it was established".

Mr Kador notes that Charles Schwab used to fire brokers who recommended stocks and a generation of Schwab traders grew up believing that advice was a dirty word. But earlier this year, after announcing its first quarterly loss in 14 years, the company announced the introduction of the Schwab Equity Ratings, a computer driven stock-rating service.

And although Schwab brokers still make no cold telephone calls, the company is preparing an aggressive e-mail alert programme. Mr Kador says Schwab is increasingly targeting the wealthy, rather than the average investor. While other firms are lowering fees, Schwab is raising them.

Schwab insiders will have to swallow hard when they read this book. For investors, entrepreneurs and students of business, it is simply a good read.

Charles Schwab: How One Company Beat Wall Street and Reinvented the Brokerage Industry, published by John Wiley, $24.95

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