How Charles Schwab Built an $8.2B Fortune Starting From a Newsletter

Find out how Charles Schwab built a billion-dollar fortune by turning a newsletter into one of the largest financial services companies.

As of June 7th, 2018, Charles Robert Schwab, Jr. was worth $10.4 billion.

It takes a lot of luck, skill, intelligence, and entrepreneurial sense to achieve that much wealth.

After all, not everyone can start with a newsletter and grow it into a company worth over $75 billion.

Whether you're trying to be the next Schwab or just trying to improve your finances, you can draw lessons from his meteoric rise to success.

Three key ideas enabled Schwab to build his fortune:

  1. Disrupt the industry

  2. Embrace technology

  3. Reinvent services while sticking to core principles

The Newsletter

Charles Schwab began his fortune with a newsletter

Charles Schwab was born in 1937 and grew up in Sacramento, California, and went on to graduate from the Stanford School of Business with an MBA in 1961.

In 1963, Charles Schwab and two other partners launched an investment newsletter named Investment Indicator.

At its height, 3,000 people were subscribed to the newsletter, each paying $84 per year.

That's $252,000 in income annually, which would be equivalent in worth to $2 million a year in 2018 terms.

A company begins. Eight years after beginning the newsletter, Charles and his partners established the First Commander Corporation in 1971.

To get the company up and running, he borrowed $100,000 from his uncle.

That would be like borrowing nearly $620,000 today.

The next time you feel down about your financial situation, remember that oftentimes, even billionaires need a loan to get their start. Why Businesses Apply for Loans

Starting a brokerage. The First Commander Corporation offered traditional brokerage services and continued publishing Schwab's newsletter.

Traditional brokerages help their customers invest in financial markets.

They research the market, offer their clients advice on where to invest, and make trades on their behalf.

Buying out the company. One year after beginning the First Commander Corporation, Schwab bought his partners' shares and owned the company outright.

He changed the company's name to Charles Schwab & Co, Inc.

The Brokerage

Charles caught his first big break when the Securities and Exchange Commission, or SEC, loosened the regulations on how brokers could charge clients for their services.

This change in the rules allowed Schwab to create a type of brokerage no one had ever seen before.

Brokers were barely competing when Schwab got his start

When First Commander started offering its brokerage services in 1971, the market was a mess.

The SEC mandated brokers charge a minimum commission on every trade they executed, no matter how large the trade.

Trading through a broker means fees. For instance, say that you wanted to buy 100 shares of a stock that was trading at $10 a share.

You might pay a minimum broker commission of around $50.

The broker would find a seller, but they may be charging a few cents more for the stock than its listed price which results in you paying $1,015 instead of $1,000.

Buying those 100 shares would cost you $65 in extra costs, or 6.5% of the transaction.

For comparison, most transaction fees come out to under 1% today.

What this meant was small investors were getting the short end of the stick, since broker fees ate up so much of their money.

Institutional investors didn't fare much better since they couldn't get any price breaks for making larger trades.

They were charged the same fees and same percentage whether they were trading a few dozen or a few thousand shares.

High rates plagued investment. While the SEC set a minimum commission rate, it didn't set a maximum.

That meant certain riskier trades could net brokers huge commissions since their payout wasn't limited.

As a result, some brokers would push individuals toward trades that would net them a large bonus while also pushing them to make expensive investing mistakes.

There was no competition. Fixed commissions on trades also meant that consumers couldn't shop around to find the best deal on brokerage services—everyone charged the same price.

That was a shame because the stock market was booming in the late 60s and early 70s.

There was so much trading going on that the market shut down on Wednesday every week because brokers needed a day just to get caught up on their paperwork.

Deregulation let Schwab's firm take the lead

In May of 1975, the SEC did away with minimum fees and let brokers compete on price.

The immediate impact was that firms began slashing their prices to compete.

However, institutional investors got a bigger benefit than individuals.

Brokers charged institutions around $0.26 per share on all trades in 1975, a cost that fell $0.15 to about $0.11 by 1979.

Individuals saw rates of $0.30 per trade only fall by about $0.04, to $0.26 per trade, in that same timeframe.

Schwab saw an opportunity to help people invest better.

A different approach. In September of 1975, Schwab set up the first discount brokerage in Sacramento, California.

Having seen how established firms disregarded the needs of their customers in pursuit of profits, he wanted to conduct business differently.

Charles thought there wasn't a need to push risky trades, charge sky-high commissions, or keep clients in the dark about what was happening with their money to make his company profitable. Owning an Index Fund on a Major World Index Yields Profit in the U.S.

Instead, he instituted a radically different set of policies for the time.

Lower charges for trading. Schwab cut consumer charges in half.

This made trading more accessible to middle-class families and individuals, expanding his customer base.

No commissions, no risks. Salespeople at Charles Schwab & Co. were paid salaries instead of commission.

This removed the temptation to push risky, high-paying trades.

No advice. Traders were instructed not to advise customers on any individual security.

This meant Schwab didn't need to employ a large, costly research division like full-service traders, further reducing his overhead.

Trading anytime became an option. Customers could trade day or night using a toll-free number Schwab set up to take orders.

This degree of access was almost unheard of at the time.

Creating a new mutual fund market. Schwab's strategy of competing on price was successful, so he expanded on it by opening the Mutual Fund Marketplace in 1984.

Mutual funds are just what they sound like.

Many investors pool their funds in order to invest in stocks, bonds, or other securities, and mutually share in the profits or losses.

They generally pay out higher returns than if you were to just deposit your cash in a bank.

What set Schwab's mutual funds apart was that he created 140 no-load funds.

No-load funds don't charge fees when a consumer buys or sells their stake in them, giving customers plenty of freedom to shift between their options.

These were incredibly appealing to individual investors, so much so that the Marketplace had expanded to 500 different no-load funds by 1992.

A new kind of brokerage

Part of the reason for Schwab's success was being in the right place at the right time.

Without deregulation, he would have had just another brokerage

The main reason he became so successful was because he took advantage of an opportunity to change the way business was done.

Charles Schwab couldn't compete with the established brokerages on service, so he competed with them on price.

Doing so, he disrupted an entire industry.

The Online Marketplace

By 1995, Schwab's talent for taking advantage of disruption had resulted in his company making $1.4 billion in revenue and managing $200 billion in total assets.

Soon, though, a different kind of disruption would take his business to new heights of profitability.

Schwab offered new services using the web

An avid early adopter of technology, Schwab embraced computerization right from the start.

He took advantage of implementing automation early on, using computers to boost efficiency by cutting down on the amount of manual paperwork his employees had to fill out.

Early e-commerce rumblings. As early as 1995, Schwab could tell the internet would bring changes.

He registered and activated the company's first website that year under the domain

By the following year, he started offering web trading services to clients.

This was a particularly prescient move, considering that over 15 million people now have online trading accounts.

Schwab entered this market early and benefited greatly from it. U.S. Customer Satisfaction with Internet Investment Services from 2007-2017

Buy and sell online. Customers could trade listed and over-the-counter stocks in 1996 using Schwab's online services.

This was incredibly advanced for its time.

For a bit of perspective, eBay had only launched the year before and Amazon in 1994.

The ability to trade stocks as easily as you could buy and sell anything else online was a game-changer for the financial services industry.

Brand recognition into the future. Schwab was facing off against many start-ups looking to stake their claims in the online trading space.

Competing against these lean companies on price was difficult.

These smaller organizations were trying to undercut him by offering online trades at $36 per transaction, while Schwab charged $39.

The upside is, even at $39 a pop, Schwab's company still beats out the established traders who were then charging at $160 using old technology.

In addition to that, Schwab had something that the upstart online trading companies didn't—20 years of history and a recognized brand.

By 1998, Schwab's online brokerage had become the number one online trader and online transactions now account for more than half of the firm's overall trades.

The company's online investment helped it grow to be worth $25.5 billion at that time, which was worth slightly more than Merrill Lynch at $25.4 billion.

Going mobile. Continuing to innovate, Schwab introduced mobile trading with its PocketBroker mobile app.

The app functioned on BlackBerries, Palm, Windows CE, and WAP-enabled phones and was connected to markets in the US, UK, and Hong Kong.

As you can probably surmise by the ancient mobile operating systems I mentioned, this was at a time before Google Play or the iTunes App Store put hundreds of different trading apps at your fingertips.

Or before you could deposit funds into a high-yield savings account at the click of a button.

Gaining the advantage by embracing technology

Transforming a business to embrace new technology is one of the hardest feats to pull off well.

It costs large amounts of money to purchase the hardware or software and then it takes long amounts of time to get your entire staff properly trained in the use of these new systems and devices.

Plus, you don't even know whether the technology will be sticking around—just look at what happened to laserdiscs and HD-DVDs.

That makes adopting any new form of technology seem like a crapshoot.

However, by carefully monitoring the market and knowing when to take the leap, you can use the early adoption of key technologies to gain an incredible advantage over the competition.

The Reinvention

Schwab grew incredibly fast during the '90s.

Some would say too fast.

A slew of embarrassments piled up.

Clients were sent the wrong financial statements, exposing investors' private information.

Thousands of Schwab clients were left without access to their accounts after two computer outages in 1997.

More than that, the company had been around for 20 years, but customer tastes were changing.

The turn of the century would bring its own set of challenges with the 2008 financial crisis.

Schwab would have to adapt to this new set of demands to survive.

After the turn of the millenium, Schwab focused on its core value of innovating on behalf of its clients.

That meant making some dramatic changes to its business model.

Giving stock advice to grow the company

Schwab had been adamant about not providing advice on which stock to invest in when he first began his company.

By 2002, things were changing.

The baby boomer generation was saving and planning for retirement.

They wanted to be sure their investments wouldn't eat up their much-needed savings.

That meant they wanted investment advice and financial planning services.

Rating investments. To meet this need, the company introduced Schwab Equity Ratings in 2002.

This was a system of rating stocks on a grade from A to F, with investors advised to buy higher-rated stocks and avoid lower-rated ones.

Since Schwab didn't perform any investment banking or offer commissions, it marketed these Equity Ratings as free from those conflicts of interest that consumers were worried about at bigger banks.

Sticking to values when making changes. These Equity Ratings weren't just introduced to help individuals invest in the stock market better.

They were part of a big-picture plan.

Schwab introduced the Core Equity Fund at the same time it rolled out the Equity Ratings, a mutual fund that used these ratings to create a strong, diversified stock portfolio.

Stocks that were rated A or B would be further analyzed by computer models.

If the stock passed the test, it became part of the fund.

This shows that the Equity Ratings weren't just a quick cash-grab playing to changing consumer tastes.

Instead, they were consistent with Schwab's mission of offering an affordable and convenient financial product.

The company was simply making available to the public a tool similar to what its own analysts use, increasing transparency and building trust with the customer.

Developing new funds to meet market demands

The financial crash of 2008 changed what financial products consumers wanted.

Luckily, Schwab was on solid footing to provide new services and investment opportunities.

The company had plenty of cash on hand when the crash hit and was able to weather the storm.

Once the market had begun its recovery, Schwab was ready to find new ways of turning a profit.

Introducing a new market. Leading up to 2012, a new kind of financial product was increasing in popularity: exchange-traded funds, or ETFs. Asset Growth of Domestic Equity Exchange-Traded Funds (ETF) in the U.S.

These funds are similar to mutual funds in that multiple investors pool their money to purchase stocks and other securities.

However, mutual funds are only valued once the market closes at the end of the day, while ETFs are listed on exchanges.

Schwab came up with an idea to create a no-fee marketplace for these funds similar to the one it created for mutual funds.

Meeting some resistance. This idea wasn't exactly well received at first.

The no-load mutual fund marketplace created decades ago was now worth hundreds of billions of dollars.

Some executives within the company worried this new marketplace would cannibalize their existing fund.

But they were soon proven wrong.

A bet pays off. The ETF marketplace became a resounding success for Schwab.

By the end of 2012, the financial worth of client assets overseen by the company had grown to $2 trillion.

New investors poured into the ETF marketplace, growing the company's profits and expanding its money management capabilities.

Know what to keep consistent and what to change

Schwab changed a lot of things over the years, introducing new products, marketplaces, and services.

That's a good thing.

Adapt to grow. Markets, circumstances, and customers all change over the years.

It takes flexibility and a genuine willingness to change in order to meet these demands.

Stick to the same approach you've used for years and more agile competitors with the ability to evolve will swoop in to steal your customers.

Companies that adapt to take advantage of new needs and opportunities survive and thrive, as shown by Schwab.

Keep the core the same. As important as it is to know when to change, it's equally important to know what a company should keep consistent.

This goes beyond products, marketing, or processes—it's all about a company's standards.

By keeping a defined set of principles, Schwab was able to build trust with its customers and endure throughout the decades.

The company put its focus on the customer—setting out to provide a better service for the client whenever it can.

A stark contrast to other firms that put their own profit first.

That takes integrating a customer-centric approach into the culture and values of a business.

Key Lessons from Charles Schwab

It took a lot of different factors coming together for Charles Schwab to grow his newsletter into a financial services giant worth hundreds of billions of dollars.

Some of these were out of his control, like changing financial regulations and shifts in the market.

However, the principles Schwab used in guiding his business have value for everyone, from the entrepreneur looking to be the next billionaire to the person just looking for more cash in their bank account.

Sometimes it pays to compete on price

Think about what Charles Schwab originally set out to do—cut costs for customers.

He wanted to offer fair prices on a service that many people needed but few could afford.

By charging less than what the established players were, Schwab quickly built up a large customer base and a profitable company.

Quality matters. One caveat to this piece of advice—the service has to be good.

Schwab didn't just provide the lowest price for stock transactions, he provided it well.

He did it by setting up a 24/7 trading hotline and making a wide arrange of products available.

He knew that even if you offer it at rock-bottom prices, if the service sucks, it won't change the fact that you're offering a terrible service.

A modern example in winning and serving customers. Look at Amazon to see this concept in action.

Its basically doing the same thing to retail that Schwab does for finance.

Amazon provides a ton of low-cost options that many people will find appealing.

For just about $10 more than a Netflix subscription, Amazon Prime users get two-day shipping on all items, music and video streaming services, and other features.

This gets people to enter its ecosystem, so that they go to Amazon whenever they want to watch a movie, buy a gift, or hear a song.

Schwab does the same thing.

It knows that the trick is to win over new customers and provide them with low-cost products to keep them happy and not switch to competitors.

For instance, Schwab can convince people to start using its services by investing in one of its no-fee ETFs or mutual funds.

After that, it can begin offering its Core Equity Fund or other products.

Attracting prospective customers in early with low-cost items allowed the company to earn money in lots of different ways later down the road.

Go where others won't to gain an advantage

Schwab's edge originally came from its ability to do what others wouldn't, and that tactic has continued to work well over the years.

Sometimes, the best plan is to buck the standard advice and try something new.

Go against the flow. When Schwab began its operations back in the 1970s, it did the opposite of what everyone else was doing.

Instead of targeting institutional investors, it focused on individuals.

Instead of charging sky-high commissions and fees, it slashed its rates.

Instead of providing paid investment advice, it gave the customer free tools and let them decide where their money would serve them best.

It probably seemed crazy at the time, but this approach differentiated Schwab from its competition.

It made it stand out and get noticed.

It helped it grow into a company worth hundreds of billions of dollars.

It's difficult to change over time. Granted, blazing a new trail is a lot easier when a company is just starting out.

That's because it doesn't have any baggage.

Change is not easy if switching your company over from one software to another entails a multi-million-dollar project, or when you've been doing things a certain way for decades.

Trying new things at an older company becomes like steering a huge ship—every change in direction must be planned out far in advance.

Continue to find ways to disrupt the status quo. Schwab has managed to maintain a culture that embraces change and constant improvement.

The company has continued to build, innovate, and learn alongside its customers and partners.

Keep your business flexible and adaptable

Everything changes, from market conditions to customer tastes to business models.

That means there will always be new demands that a company must rapidly adjust to meet.

By taking the right approach, companies can turn these challenges into opportunities.

Change with the times. This is one area that Schwab excels in.

The company began with a promise to never give its customers investment advice.

That didn't prevent it from changing that policy when the time was right.

It's this flexibility that has kept Schwab competitive over the years.

Instead of stagnating, it continued moving forward and growing.

Build change into the culture. At the beginning of the company, staying flexible was a matter of survival.

Several high-profile traditional brokerage firms had gone bankrupt in the years before Schwab made its entrance onto the financial stage. Commercial Bankruptcy Filings Have Decreased from 2008-2018

It would take building a culture where change was a fact of life to keep the company from joining the businesses that had failed before it.

To do that, Schwab instituted a set of core values.

Focus on the customer.

Offer a good service at an affordable price.

Embrace technology.

While market trends, products, and regulations have all changed over the decades that Schwab has been doing business, these values have remained the same.

Schwab shows how innovation, technology, and sticking to core principles leads to success

Charles Schwab built an amazing company—and became one of the richest men in the world doing it.

That took seizing an opportunity when it presented itself, creating a culture of disruption, and embracing technology.

I find it kind of incredible that he was able to do all of that by starting with an investment newsletter.

Because personally, I don't put much stock in many of these newsletters, especially the ones that charge a subscription fee.

Plus, nowadays, there's a lot of people who sit behind a keyboard pretending to be a stock-picking genius who's willing to email you their great ideas in exchange for a moderate fee.

Of course, things were a lot different back in the 1970s, which is why Schwab's newsletter stood out.

However, some things haven't changed.

The keys to running a successful business are still the same.

For one, you shouldn't be afraid of adopting the latest technology—change can be good if you know how to stick to your principles.

It's probably safe to say that few of us will ever achieve the same level of success that Charles Schwab did by using these ideas.

However, you might be able to use these concepts to make your side hustle a little more profitable, your small business run a little better, or create a better plan for the company you might start one day.

Have you ever used Charles Schwab Corporation's services?

Were you impressed by the results you got?

Any great stories (or nightmares) to share with the rest of us?

Let us know in the comments below!

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