Charles Schwab: My ‘Ah-Ha’ moment | Forward Progress

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0:42Ice cold. As for the frozen taquitos and mystery leftovers, we'll keep that between us. Drink it cold or don't drink it at all. Jägermeister. Damn, that's cold. Drink responsibly. Jägermeister liqueur 35 % alcohol by volume. Imported by Masked Jägermeister, U.S. White Plains, New York. Hey, it's Thursday, which means we're coming at you with a short, feel-good story from a past guest. Hope you enjoy the clip. This week, Charles Schwab.

1:14So you, I believe, really admired Charles Merrill and him opening up investing to the middle-class investor. Well, I wasn't a great fan of his, although I was a great fan of Merrill Lynch and certainly knew the company. But I really started out in my early part of my business when I was really professional. I was a financial analyst. I was a stock market analyst in finance, looking at companies and trying to analyze them. Worked for a small investment advisory company. We were trying to pick companies that would be the great growers of the future. So I learned from some people that were in that area.

1:54And that's how I thought you could create wealth, is finding great companies that had the answers for tomorrow, and technology will say, or whatever it might have been. And that was my first real deep interest. And so I wanted to be, and I was, a financial analyst. And it drove you crazy, the rates that these companies were charging. The company I worked for was a small company. We used brokers that would come in with ideas and so forth and try to sell us, because we were managing portfolios for individuals. It was sort of, at that time, one of the independent advisory firms. It had a small number of accounts, probably a couple hundred accounts.

2:42And I was an analyst looking at companies that we would then tell the portfolio manager, this looks like a great company. Why don't you put it in this person's portfolio? And so we had to make the case why this company was a great company. Why did you feel that there were deep flaws in the pricing structure? As it was the case, when I was working for this firm, that brokers would come in from different firms trying to sell us their ideas, their stocks. That's how they made money. They'd sell me a story on ABC Company. I'd write all the notes down and analyze individually. And if we were to buy the stock, and the portfolio manager decided to buy the stock, upon my recommendation, we'd buy it generally through that broker.

3:30The broker would then make a fixed commission, which was commissions that had been fixed for 200 years, very high. It would cost, for a small amount of money, it would cost you 4 % to buy a stock or sell a stock. Very high commission, very costly. and only the most wealthy people could really participate as such. The average person really could, and maybe they could buy a mutual fund. But those were very high and expensive things to buy also. There were 9 % to buy a mutual fund. It was really a period of time when the financial industry was all about, I wouldn't say greed necessarily, but it was very expensive to buy and sell stocks, equities at that time.

4:15And you wanted to change that, yet you— And so I always thought it was terrible. And so the opportunity, a number of years later, the SEC and the Justice Department and the Congress were looking at the rates that were fixed. You know, many industries were fixed for many years, whether it was pharmaceutical, whether it was retail. And the financial world was also in that basket of fixed rates. And so it was deregulated. Then in 1975, I saw it coming, started Schwab. And amid deregulation, you're thinking companies are going to drop their rates. Merrill Lynch actually raises theirs. That was obvious.

4:58I thought they were going to control the whole market. Well, they didn't. They raised their rates and off they went. And we dropped our rates and off we went. But so you said before you're an awful storyteller and awful salesman. You didn't think or you questioned whether there was a way for you to make a living in finance. Well, that's why was like the big aha. The aha to me was I thought there was a. Cadre of people, you know, percentage four or five percent of investors in the country who wanted to be independent investors. they didn't really need a salesman around to be their inspiration to buy a stock.

5:44They wanted to buy it on their own after good analyses and at a cheap price. Or buying it or selling it. So I thought there was a real business for a discount brokerage. And that was my aha that we didn't need salesmen. In fact, we didn't want salesmen. We didn't want people to be incentivized by a big commission to go sell an idea. We wanted to have all that savings, take the commission out of the thing and just employ the people and have them paid a salary and a bonus based upon great service. So we were the first and still are. All our employees are salaried in compensation. No one makes a commission.

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7:07Action! Simon Williams auditioned for Wonder Man. I'm going to need you to sign this. Assuming you don't have superpowers. I'll never work again if anyone found out. My lips are sealed. Marvel Television's Wonder Man. All eight episodes now streaming. Only on Disney+. In the early days of building Schwab, how many times did your chief compliance officer come to you and ask you to take another mortgage out on the house? Well, that was because we were growing so quickly, and we needed capital. I couldn't. Wall Street wasn't available to me to raise money for me because we were building their competition.

7:47They didn't want our competition. They didn't want to see us cut their rates. So we had a tough time. So I had to go to friends, family, anybody who knew me who might be considered having an investment in the company. How comfortable were you with that at the time? Oh, I was terrible at that. I was just, I hated it. I did not do a good job of selling myself. And what's this I hear about your chief compliance officer on the way into work often would go in the alley and vomit? Oh, that was a story I didn't even know about that. Someone told me that story. What was the deal? I just heard that he got very ill because we were growing so quickly, and there were so many different rules and so forth, and he had a tough time with our growth.

8:44And there's a point in which where you're looking forward nine months because the company's growing so fast and it wasn't just another floor you need, but a whole building. Whole building, yeah. What were the challenges that were created by just the explosive growth? Well, obviously the financing of it, and then behind that the technology that handled the volume, the very physical volume, whether it's phone calls or orders, processing, all those things were quite complicated to say the least. I wasn't any expert in that, so I was having a certain amount of expertise I had to hire or have within the ranks of the company.

9:26and it was just bringing all that together. It was a little symphony that was growing, but we didn't know how big the symphony was going to get, but it took a lot of players along the way. That's it for now, but if you're hungry for more in-depth interviews, head over to youtube.com slash Graham Bensinger. You can dive into our deep library, which includes more than 2 ,000 clips spanning 12-plus years. Thanks again for listening. By all Lorenzo, the pitch looked good. Yeah, so green. USA Keeper was decent enough. Didn't have much to do. Ugh, 99 minutes. Not a single goal. Well, Bet365 sure came through, though.

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