Charles Schwab makes all the right choices

Charles Schwab (NYSE:SCHW)

has evolved beyond its humble beginnings as a discount broker. Even before the advent of the internet, Schwab's niche offered its discount brokerage services to retail investors at a cheap one-time fee, garnering almost 51% market share from retail investors. While a trade commission could cost between $150 and $300 or more at a full-service brokerage depending on the size of the trade, it would only cost $30 at Schwab. Full-service brokers administered investment advice and provided research and recommendations, while discount brokers only offered discount commissions without any advice. For self-directed retail investors, the savings were a stark contrast. Schwab's human brokers worked on salary, not commission like full-service brokers. At the time, the distinction between full service and discount was very obvious

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The poor man's broker

For decades, Schwab has had the stigma of being the poor kid in the lunch queue with a discounted lunch ticket. Schwab was the embarrassing poor man's alternative to full-service investment banking brokers, including Goldman Sachs (NYSE: GS), Morgan Stanley, Merrill Lynch, Lehman Brothers, Bear Stearns and Salomon Smith Barney. The establishment was completely shaken by the 2007 financial crisis causing the unthinkable as Lehman Brothers went bankrupt and Bear Stearns was bought out for pennies on the dollar by JP Morgan (NYSE: JPM). Merrill Lynch was swallowed by Bank of America (NYSE: BAC). Salomon Smith Barney had been acquired by Morgan Stanley (NYSE: MS). Schwab has evolved to expand its online presence to include independent research, recommendations and asset management services, while full-service brokers have begun to cut commissions as the line between full-service and discount continues to fade.

Here's why the TD Ameritrade acquisition was brilliant

Fast forward to the electronic era of financial markets. Schwab was the first of the major discount brokers to transition to commission-free stock trading to compete with Robinhood (NASDAQ: HOOD) and fintech apps like Sofi Technologies (NASDAQ: SOFI) acquiring investors and retail traders with its commission-free transactions. , a simple and fun interface, and a multitude of services. They may have made one of their best moves by acquiring TD Ameritrade in 2020 despite the COVID pandemic. The acquisition brought in $121 billion in new base assets with 1.2 million new brokerage accounts that averaged nearly 6.5 million daily transactions. Most saw it as a game of bolstering its active trader base with the addition of Ameritrade, including the Think or Swim trading platform. This would complement its nearly two-decade-old acquisition of e-commerce company Cybertrader. However, in a bear market, the additional assets helped pump its profits from net interest rate income and conversion to wealth and asset management services, while active trading volume fell. . Looking back, this was one of the most brilliant moves in the financial services industry, as Schwab completely transformed itself into a comprehensive one-stop-shop for investors and traders. This prompted Morgan Stanley to acquire E*TRADE to strengthen its base of investors and traders. Schwab also elevated its reputation, status and share price as it continued to dominate retail investor market share. Trading revenues represent only 18% of total revenues. The addition of retail customers and assets from the acquisition of TD Ameritrade helped bring net interest income to 51% of total revenue and asset management and administration fees to 21% total revenue.

Look at these levels on the...