CEO Interview: Schwab’s Bettinger embraces lower prices, customer-focused strategy in turmoil

CEO Interview: Schwab customers holding onto cash

CHICAGO — Walt Bettinger hasn’t quite seen everything in the stock market but, in just 18 months as CEO of Charles Schwab Corp., he’s getting close.

Succeeding the company’s namesake founder, Bettinger faced the Great Recession and the worst market plunge in decades when he took the helm of the huge discount brokerage in October 2008.

Then stocks went on one of the most remarkable bull-market runs in history. Rebounding off a 12-year low, the Standard & Poor’s 500 index is up 73 percent in just over a year.

Keeping Schwab’s business flowing amid investor jitters over the meltdown is a delicate balancing act.

This year, the 15-year company veteran decided to address the widespread wariness of the markets by making a dramatic move that touched off a price war with its rivals. In January Schwab reduced its online stock trading commission to a flat fee of $8.95, down from $12.95 for most trades.

Fidelity Investments undercut Schwab and other competitors E-Trade Financial and TD Ameritrade by slashing its fee to $7.95 just four weeks later. But investors shouldn’t necessarily expect further cuts from Schwab.

“We’ve never tried to be the cheapest provider,” Bettinger said in a recent interview with The Associated Press. “We want to offer the best value.”

It has been a challenging time for brokerages, as for all financial services companies. Schwab saw its earnings fall 35 percent in 2009 on slackening revenue. The company, which is based in San Francisco, said this month that it also expects first-quarter earnings to lag as the dampening of its trading revenue continues.

Yet customers are hardly fleeing. The firm brought in $122 billion in net new assets during Bettinger’s first 17 months as CEO, through February, and added 787,000 new accounts last year. Its full-year profits, while down, still totaled $787 million.

Bettinger shared his thoughts on the market rebound, the change in investor habits and the outlook for financial services:

Q: What has the market rebound meant for your business and your clients?

A: It certainly has helped the psyche of the investors that we serve. At the same time, they are still more risk-averse. They have about 28 percent of their money with us in cash, which is double what it might be in a more bullish environment.

There’s a much greater awareness around things like asset allocation, and a recognition that hot stocks and hot funds are not the path to long-term financial growth. But clients are looking for more guidance. We’re seeing our average talk time on the phone is significantly longer than it was several years ago, and the volume of clients working with our financial consultants in the branches is significantly higher.

Q: Why did you lower prices?

A: We really do have a view that if you do the right thing by clients, clients will choose to do more business with you. We tried with the pricing move to $8.95 flat to take a step consistent with many other efforts we’ve made — to get rid of “gotchas,” not have surprises, things that tend to undermine trust. When you simplify pricing, that enhances trust.

As we continue to try to operate our firm more and more efficiently, it’s also important for us to share those benefits with the clients that we serve.

Q: How are you addressing potential customers’ concerns about the turmoil in financial services?

A: We made available a core lineup of ETFs (exchange-traded funds) without a commission.

The dilemma for smaller investors has been that they couldn’t dollar-cost average into ETFs because they would get hit with a commission every time. We also have introduced a portfolio of ETFs that a client can invest in for less than the cost of a typical no-load mutual fund.

Those are two examples of steps we took from listening carefully to our clients and their desire to reduce the volatility in their portfolio.

Q: What did investors learn about investing strategies from the recent market swings?

A: Average investors learned that things like transparency are exceptionally important. And that simplicity matters a lot — that if something is too complex to understand, or a company’s results are too complicated to figure out how they’re delivering them, those are things that investors want to look at very carefully.

What we’ve also learned as a business is that value matters and trust is critical. Being able to trust who you’re interacting with is something that consumers are going to carry with them for a long, long time.

Q: What financial products do you think have the biggest growth potential?

A: ETFs are one of those because of their transparency and their very low cost. Fixed income also is an area that is likely going to continue to grow, with risk aversion being at a higher level. Consumers are more interested in it. And people recognize that cash is one of the important diversifiers in their portfolio, so we think that cash will continue to play a significant role.

Q: What experiences have shaped you as a leader?

A: Certainly those early years starting my own firm (The Hampton Co.) had a significant impact. I was cold-calling companies trying to convince them to hire me to help service their retirement plans, and faced a lot of challenges and built a lot of humility in that process by getting rejected. After a year of cold-calling, I finally got my first client.

I also had the opportunity to do virtually every job in a financial services business, whether it was answering the phone or making the copies or being the top salesperson. I think getting some dirt under the fingernails is a critical part of developing your authentic leadership perspective and ability to interact with employees throughout an entire organization.