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Schwab introduced Tele Broker, a fully automated telephone system that allowed customers to retrieve real-time stock quotes and place orders. Schwab also leveraged its back-office operations with Schwab Link, a service to provide fee-based financial advisors with back-office custodial services and the capability for RIAs to plug into Schwab's computers to trade. The RIA market became an important source of revenue for Schwab. By 2000, Schwab had 5, 900 affiliated RIAs, who controlled about 30 % of Schwab's assets, up from zero in 1987.
Merrill Lynch viewed these RIA's as a "virtual sales force" for Schwab: "We don't compete with the discounters. We do compete with Schwab. They have essentially built a Merrill Lynch by proxy. " Schwab introduced the Mutual Fund One Source program in 1992, enabling customers to purchase no-load mutual funds without paying commissions. The vast majority of One Source assets were in non-Schwab funds, except the Schwab Funds money market, the only money market fund offered to One Source customers. Funds were ranked and presented to Schwab customers based on objective characteristics (e. g. , sector, investment style, or management fees) and performance.
Customers could use their Schwab account to buy or sell more than 1, 100 mutual funds from about 200 third-party fund families without paying any fees, and the transactions were integrated into their Schwab account statements and reports. Schwab serviced these accounts, aggregating all One Source trades into a single daily transaction that was communicated electronically to the participating funds. Schwab charged fund providers a 25 - 35 basis point fee for listing the fund in One Source and providing shareholder services. Schwab impacted the industry in various ways.
However, we need to first define the various types of firms that existed. The industry consists of three distinct types of firms: traditional full service brokers, limited-service discount brokers and Internet brokers. The market share for these three types of firms was as following: Full service brokers - 74 %, Discount Brokers - 20 %, and Internet brokers 4 %. Traditionally, full-service brokers have aided investors in making investment decisions through expert advice and guidance. They guide investors through the purchase and / or sale of stocks, bonds, mutual funds, options, and other financial securities. Their services are delivered through a network of local offices and are they highly compensated through their firms' individual commission structure.
Leading full-service brokerage firms include Merrill Lynch, Paine Webber, Dean Witter, Smith Barney, and Prudential Securities. Limited service brokers surfaced in the mid- 1980 's to challenge the traditional full service brokers. They became increasingly popular in the late 1980 's and early 1990 's with knowledgeable investors who take an active role in managing their portfolios, trade frequently and want to minimize trading costs. The discount broker's, such as Schwab, main advantage is that they offer investors discounted commissions. They are able to charge these reduced fees since they don't employ brokers or investment researchers. Customer service representatives, who are not authorized to give investment advice, handle purchases and / or sales primarily over the phone and investors are provided with little to no investment information and market or company updates.
Notable limited-service discount brokers include Charles Schwab, Quick & Reilly, and Fidelity Investments. In the mid- 1990 s, the growing use of the Internet induced online brokers to launch Internet trading. In the years since, several discount brokers, as well as pure electronic brokers, entered the new business segment and fought aggressively for market share. The Internet offered such firms essentially two technological advantages. First, online brokers can provide less expensive trade execution than their offline counterparts. Placing orders online allows investors to circumvent personal brokers, reducing transaction costs.
As a large number of investors established Internet connections, the web became a ubiquitous network that can be used as a communication channel between a brokerage firm and its customers. Online trading also lets brokerage firms automate their order placement process, thereby economizing on personnel time and effort. Secondly, the Internet contributed to the emergence of online trading by becoming a medium for the transmission of information. Large groups of consumers became increasingly sophisticated and more able to direct their own financial affairs without the help of a personal broker. The Internet facilitates the diffusion of information, eroding one of the main advantages of professional brokers: their access to superior information. The use of the Internet has led to a sharp drop in trading costs.
the average commission charged by the top- 10 online trading firms fell from $ 52. 89 at the beginning of 1996 to $ 15. 75 in 1999 - a 70 % reduction. The attractive pricing has stimulated great growth. Economic theory points out that in building a network, firms often tend to establish the most valuable connections first. In this respect, online firms initially focused on attracting the busiest traders. However, as new accounts start contributing less trading activity than existing ones, online brokers may find expansion an increasingly costly task.
It is easier to attract a small number of large customers than a large number of small customers. Furthermore, the explosive growth of online trading has attracted many entrants to the industry, leading to intense competition. In addition to discounters and pure electronic firms, traditional full-service brokers like Merrill Lynch and USB Paine Webber offer online services. The proliferation of online firms may thus lead to even deeper price discounts and tighter profit margins. The speed at which the Internet transformed the brokerage industry surprised everyone. Since 1997, the number of trades executed on the Internet had grown at a compound annual rate of over 111 %, accounting for about a sixth of the market by 1999 (Exhibit 1).
The share of US retail commission revenues garnered from online trading increased from 2. 2 % in 1996 to almost 10 % by 1999, even though online trading commissions were far less than full-service commissions. Internet technology, based on open standards and scaleable computing power, had decreased both the fixed and variable costs of the brokerage business and lowered barriers to entry for the industry. New online brokerages, unhampered by the legacy systems of traditional firms, sprang up and offered fees that were less than one tenth of those charged by full-service brokers. In 1995, Schwab recognized the increasing importance of the online channel. It put together a team to develop a new software-based online trading product called e. Schwab, that enabled investors to trade by dialing a toll-free number.
The separate development unit reported directly to David Pottruck, Schwab's co-CEO, and evolved over time into a separate Electronic Brokerage Enterprise. Priced at $ 39. 95 for up to 1, 000 shares, e. Schwab was piloted in December 1995 and rolled out nationally in January 1996. Customers had to open a separate e. Schwab account and could only use a PC keyboard to trade, with no human contact.
As e. Schwab was being launched, Charles Schwab challenged his Electronic Brokerage team to devise a Web-trading product by Valentine's Day 1996. By the end of February 1996, the Electronic Brokerage group had a prototype to show Schwab, and the company went live with Web-trading on March 31, 1996. Initially, customers could only check balances, buy and sell stocks and get real-time stock quotes. Nonetheless, customer response to Web-trading was enthusiastic. Schwab aimed to have 25, 000 Web-trading accounts by the end of 1996; it realized that goal in the first two weeks of operation, even though Schwab did not advertise the service, and most customers only learned of it by word-of-mouth.
Schwab quickly dropped the price of Web-trading to $ 29. 95, but kept the restrictions of the e. Schwab account. "We were trying to offer a technical product that didn't have all the rest of the services that Schwab had to offer but could offer a lower price, " recalled David Pottruck. When it became clear that the dual pricing structure confused and irritated Schwab's customers, who had to choose between service and price, Schwab altered its strategy. Starting January 15, 1998, Schwab offered Web-trading for everyone at $ 29. 95 for up to 1, 000 shares.
Rather than try to prevent cannibalization, estimated to cost the company $ 125 million a year in lost revenues, Schwab pushed all of its customers to its website (web). This was a phenomenal success: by the end of 1999, Schwab had 3. 3 million active online accounts holding assets of $ 349 billion, and 73 % of Schwab's trades were conducted through online channels. While most Schwab's trades originated on the Web, the company maintained a strong presence across multiple delivery channels functionality that Schwab's customers highly valued. Customers' ability to select a channel, whether they were placing a trade or seeking information, was core to Schwab's value proposition. Schwab customers could trade through Schwab's branch offices, through representatives at call centers, via automated telephone services, over the Internet, and over wireless devices.
Schwab sought to take advantage of synergies between the Internet and its traditional channels. For example, Schwab planned to hold over 13, 600 online investing seminars in 2000 in its branches for those not comfortable with Internet technology. Looking at the market share in Figure. 1 below, Schwab was the leader in 1999. However, in today's world competition has gotten even more competitive. Fidelity and Vanguard have become household names in today's market. Fidelity with their proven customer service, range of mutual funds, stocks, and Retirement plans is well balanced diversified credible firm with a proven track record.
Vanguard is one of the newer but fast growing firms. Vanguard trademark is for low commission and expense ratios fees. Vanguard has the lowest fees in the industry and makes a big difference if one is a long-term investor. In conclusion, Fidelity and Vanguard are the tier 1 firms in the industry with Vanguard having the potential to be # 1 in the near future.
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Research essay sample on Merrill Lynch Brokerage Firms
