Through the 1980s and 1990s, Schwab management had brilliant, revolutionary execution. It created a mutual fund marketplace and electronic trading. It was an early advocate of using the Internet for trading and information. The institutional division (where I spent a good deal of my time) was a gold mine. The discount broker was out in front of every change occurring in the industry.
The beginning of the end occurred in early 2000 with three events that equated to a bell ringing at the top. One morning, I remember getting a company-wide voice mail from CEO Dave Pottruck gushing about our stock being at $100 per share (you won't see that on a chart due to subsequent splits). Strange.
Schwab spent close to $500 million buying Cybercorp, creator of an active trader platform now known as Trader CT. I think this was a wild overpayment. With this purchase, the company moved from creating innovation to buying it. Yikes.
Lastly, the company opened a new call center in Austin, Texas, with great fanfare and a huge investment. As Austin was opening, calls to the center where I worked in Phoenix were already on the decline. We had a lot of frontline employees waiting five minutes or more in between calls. Uh-oh. The Austin call center has since been closed.
Since then, the company has continually been behind the curve and reactionary. The various price cuts over the years have been to try to combat retail investors leaving for cheaper commissions. The latest service model is called Personal Choice, with nine service levels. I get the same message from my former colleagues who are still Schwabbies. They tell me there is mass confusion about the new product offering and that morale has been dreadful since the layoffs first started in the spring of 2001. Of course, I realize that this is anecdotal evidence, but I still think it's important to note.
Wednesday's Wall Street Journal has articles talking about a trading slowdown in the industry and the potential for more layoffs. It is true that, as Nathan Slaughter says in his commentary, Schwab is by far the biggest company in the group with the broadest product line. But trading in the stock clearly shows there are problems, as Schwab has badly laggedAmeritrade
For the sake of my friends who are still there, I sincerely hope the company turns things around. However, I see no catalyst that shows it can.
Despite Schwab's difficulties, David Gardner still believes enough in the company to include it among his Motley Fool Stock Advisor recommendations. Sign up for six months, without risk, to learn more.
Fool contributor Roger Nusbaum is an investment manager and wildland firefighter in Prescott, Ariz. At press time, neither he nor his clients owned any of the stocks mentioned.