Schwab worked its way up the food chain by leaning into the “discount” part of the discount brokerage business, fueling more than a decade of expansion.
The firm got its start in the 1970s by undercutting Wall Street firms that would charge hundreds of dollars per order. It thrived on comparatively low-cost trading into the 1990s, moving online to compete with upstarts including E*Trade Financial Corp.
But Schwab lost its way in the early 2000s, charging more than competitors for trading and juggling disparate business lines. To reverse course, founder Charles Schwab returned to the helm and refocused on one thing: cheap fees. That decision to reconnect to the discount ethos helped it grow to its dominant position today.
“The logic of Schwab has been -- will always be -- to reduce commissions,” said Robert Burgelman, professor of management at the Stanford Graduate School of Business, who’s followed Schwab for two decades and written case studies on the company.
Schwab was able to kneecap its competitors last month with zero fees in part because it relies less on trading for income.
Its other business lines include adviser services and its own low-cost investment products. And the firm earns most of its revenue from reinvesting customer cash through its bank division. When falling interest rates threatened that income stream, Schwab announced in September that it was cutting 3% of its staff or about 600 jobs.
Monday’s announced deal puts additional heat on E*Trade, which was long thought to be a potential acquisition target for TD Ameritrade. After falling 9% on the day news of Schwab’s move broke, E*Trade’s shares rose more than 3% on Monday.
“Frankly, if I’m on the E*Trade board I’m certainly feeling a sense of urgency to find a buyer,” said Thomas Bradley, former president of TD Ameritrade.
An E*Trade spokesman didn’t respond to a request for comment outside normal business hours.
Some advisers were on edge about the tie-up. Those who use Schwab to safeguard assets wonder if they’ll be able to maintain the same level of service, especially for smaller clients.