The Cases of Securities Brokerage Services

CHAPTER 6 Multiple Case Studies

6.2 The Cases of Securities Brokerage Services

Table 6.6 Challenges to the commercial exploitation of ITV service (Cont.)

Dimension Major challenge

Board’s approval

Strong senior management support for the ITV service Incentives for the ITV service

Teamwork environments for the ITV service Managerial

Training programs to enhance the skills for the ITV service Source: constructed by the author

6.2 The cases of securities brokerage services

The fierce competition in declining transaction cost and emerging non-traditional institutions has made the brokerage industry standing on an inflection of point. As the information technology advances and the Internet take off, the players in the brokerage industry realize that the market forces have changed. They exploit wide-ranging capabilities to offer a broader range of value-added services for competing in the brokerage landscape (Loony and Chatterjee, 2002). These companies are competing not only to provide superior services, but also to design profitable business models that take advantage emergent electronic commerce. The following will first describe the underlining functions that all brokerage value-chains should provide, then, three library cases of securities brokerage firms were adopted, the Charles Schwab in 2002 from Harvard Business School; the Charles Schwab 2007 from Stanford Graduate School of Business; and Polaris 2008 from Richard Ivey School of Business of Western Ontario University respectively. In view of the information and situation depicted in those cases are factual outcomes, we focus on

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the problems or challenges that the organizations face and the methods they overcome the challenges.

6.2.1 The description of securities brokerage services

The execution of securities brokerage transaction can be regarded as a complex value chain. In the literature, Kalakota and Konsynski (2000) describe the portfolio of services offered in the brokerage industry as Figure 6.3.

Figure 6.3 The unbundling of the brokerage industry Source : Kalakota and Konsynski (2000)

Functionally, every on-line brokerage value chain is comprised of three main categories, namely electronic distribution, consumer context, and the tools/content (Kalakota and Konsynski, 2000). The related components involved the value proposition is illustrated below in Figure 6.3. In the electronic distribution category, all the roles must be in place to distribute the product and ensure the quality of distribution. Besides, a distribution infrastructure is required to assist the new account acquisition and development. In the customer context category, contemporary industry leaders attempt to unify the content bundles, for instance, interactivity, easy

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navigation and understanding, entertainment, and personalization, into an experience by framing the customer context. One example is to build an open and participant end-user community to attract active traders and enhance the brand awareness. Thus, a proper mix of content, context and communities has become a critical issue for the modern brokerage firms. The last one in the value chain, the tools/content category, involves all the related information that the customers required for making investment decisions. Some examples are real time quotes of stocks, options and futures contracts, investment newsletters, up-to date information on stock upgrades and downgrades, charting and analysis programs and high-end advisory services. Traditionally, the brokerage firm set up their research department to analyze the content or vertically integrated with the subsidiary companies. Nowadays, as the electronic commerce revolution transformed the brokerage industry, firms cooperate with their partners to provide wide-range investment information for customers by various forms of alliance.

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Figure 6.4 The on-line brokerage value chain Source : adapted from Kalakota and Konsynske (2000)

6.2.2 The cases of Charles Schwab 2002, Charles Schwab 2007 and Polaris 2008 The deregulation of securities brokerage in 1975 allowed the USA traditional brokerage companies to begin catering its services to those largely neglected consumer market, the middle-class investors. To date, the securities brokerage

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industry is highly concentrated in USA. According to an industry report by Hoovers, the top 50 companies account for more than 80 percent of revenues (http://www.hoovers.com/securities-brokers/--ID__233--/free-ind-fr-profile-basic.xht ml). The major services they provide are stock brokerage, investment advice, brokerage of bonds and derivatives, and the brokerage of mutual fund. The most part of revenue is derived from the stock brokerage, which accounts for about 40 percent of industry revenue.

The Charles Schwab Corporation, based in California, is founded as a traditional brokerage company, and is world’s largest online brokerage with the advantage of enormous scale and is unmatched at meshing people and technology to keep costs los and the level of service high (Charles Schwab in 2002). They expanded their customer segment and targeted the emerging affluent, high-net-worth investors with over

$500,000 to invest, new strategy was launched and new IISI was proposed for further business. Based upon the information presented in the case, Charles Schwab’s core competency is the ability to offer its services to a wide variety of customers utilizing several transaction methods. Schwab was able to drive innovation in the investment industry through its use of technology.

In 2007, Charles Schwab returned to CEO for redefining their core business and calibrating their organization model, the “One Schwab” view of all customers required new strategy and new IISI to fulfill.

As for the Polaris case, strong leadership has led its organization to be agile and responsive to the market needs quickly. Their trading platform is requested to cover all the operational activities among the front desk, middle office and back office. This process development not only can offer the customers investment consulting services and financial products by well-design software in the front desk, but also match, confirm, clear and settle related business activities by information technology systems

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in the middle office and back office (Polaris, 2008).

6.2.3 The evidences of three library cases supporting the framework of challenges for IISI

The following Table 6.7, Table 6.8, and Table 6.9 show the evidences of three library cases and ground the framework of IISI.

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Table 6.7 Evidences of Charles Schwab in 2002 supporting the framework of IISI Phase Detailed ChallengesStatements about challenges Statements about the method to overcome the challenges IT acquisition phase

Technical (alignment)

Three full-choice offering Set a new standard in the world of personalized financial advice. True to our vision: expert. Objective, and not driven by commissions or hidden investment banking interests. Built on the past successes in discount brokerage, online brokerage, and mutual fund investing IT acquisition phase

Technical (alignment)

A technology company that happens to be in the financial services business. A culture of embracing technology

Technology is not a channel; it’s the air we breathe Think about the business as a human-technology partnership

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Table 6.7 Evidences of Charles Schwab in 2002 supporting the framework of IISI (Cont.) Phase Detailed Challenges

Statements about challenges Statements about the method to overcome the challenges IT acquisition phase

Technical “bet the company” investment: bring entire trade-clearing system in-house Break ranks with the rest of the financial services industry, which still outsourcing the function from a third-party vendor. Cost $500,000, was made at a time when the net worth of the company was only $500,000.

Shortly after launce, the company sought out a technology service provider to implement a system to automate trade clearance and settlement. In 1979, recognizing the strategic value, bring its entire trade-clearing system in-house In the mid-1980s, Schwab began leveraging its technology infrastructure to develop innovative new service offerings. IT acquisition phase

Technical Schwab pioneered online trading with the introduction of Equalizer- a software application that was distributed to customers on a set of diskettes.

Schwab’s use of technology to provide innovative service offerings and to provide its customers with multiple, ease-to-use channels through which to do business with Schwab was widely recognized as a benchmark for the industry.

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Table 6.7 Evidences of Charles Schwab in 2002 supporting the framework of IISI (Cont.) Phase Detailed Challenges

Statements about challenges Statements about the method to overcome the challenges IT acquisition phase

Technical Schwab executives considered Internet technology as a platform for growing online trading business.

e.Schwab Internet brokerage service (pricing 39.95, then, lower to 29.95, 1996, however still higher than E*Trade at $14.95) IT Acquisition/ Set-up phase

Technical /Organizational A special project team to develop an Internet online-trading offering

The skunk works team reported directly to Pottruck Senior management team decide the online project should be raised to the level of all other business units so that it would get the management attention and funding it needed.

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Table 6.7 Evidences of Charles Schwab in 2002 supporting the framework of IISI (Cont.) Phase Detailed Challenges

Statements about challenges Statements about the method to overcome the challenges Set-up phase

Organization (Competency) Schwab was the first discount brokerage firm to open a branch office and to offer 24 hours per day and 7 days per week services

Empower investors with the information and tools needed to make informed investment choices. Provide customers only with third-party investment research and ease of access at a much lower cost structure Focus on the customers who wished a more self-directed style of investment Key components of value proposition : ease of access and simplification of transactions

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Table 6.7 Evidences of Charles Schwab in 2002 supporting the framework of IISI (Cont.) Phase Detailed Challenges

Statements about challenges Statements about the method to overcome the challenges Set-up phase

Managerial (Business model)

Commission structure Most full-service brokerage paid the brokers commissions on each trade; Schwab paid a salary plus bonus that was calculated based on overall job performance. The bonus was tied to (p4) attracting and retaining satisfied customer achieving productivity and efficiency targets the desire to be the most useful and ethical provider of financial services－founding principle of the company. Set-up phase

Organizational Acquired by BankAmerica ($57 million,1983) Entrepreneurial culture vs. conservative style at BankAmerica. Schwab brought back the company($280 million) Months later, go public (raised over $450 million)

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Table 6.7 Evidences of Charles Schwab in 2002 supporting the framework of IISI (Cont.) hase Detailed Challenges

Statements about challenges Statements about the method to overcome the challenges Set-up phase

Organizational (Competency)

Pursue an aggressive growth strategy product innovation a national advertising and marketing campaign, the key messages:

y

its full range of high-quality, ease-to-ease brokerage services

y

its emphasis on putting individual customers in control of their investments

y

the value delivered – Schwab traded cost 30% less tans those of full-service brokers

y

its commitment to provide a trusted, conflict-free place for individuals to trade

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Table 6.7 Evidences of Charles Schwab in 2002 supporting the framework of IISI (Cont.) Phase Detailed Challenges

Statements about challenges Statements about the method to overcome the challenges Set-up phase

Organizational (Competency)

unexpected cost of running the dial-in network service (StreetSmart) - spend customer service representatives a lot of time to help customers install and configure the software and modem Diffusion phase

Inter-organizational Partnership

Acquire CyberTrader in early 2000. a direct-access broker specializing in electronic trading and brokerage services, founded in 1995 as a trading technology company. 1998, CyberTrader change business model to include providing online brokerage service to individual investors After the acquisition by Schwab, CyberTrader became a wholly subsidiary of the company CyberTrader software → the engine powering StreetSmart Pro, Schwab’s expanded trading platform (launched in March 2001)

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Table 6.7 Evidences of Charles Schwab in 2002 supporting the framework of IISI (Cont.) Phase Detailed Challenges

Statements about challenges Statements about the method to overcome the challenges Social (Market)

The financial service markets and the global economy spiraled downward and existing players competed for a piece of a much smaller pie. The result of Harris Poll by Schwab to measure customers’ sentimentsnine of 10 believe, already in or are entering a recession

y

eight in 10 believe that the recession will last at least 6 months

y

one-fifth will delay retirement

y

59% look for safer investments

Pottruck faced one of the most challenging times in the company’s history. The chaos and uncertainty as a catalyst for reinventing itself- and the industry.

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Table 6.7 Evidences of Charles Schwab in 2002 supporting the framework of IISI (Cont.) Phase Detailed Challenges

Statements about challenges Statements about the method to overcome the challenges Diffusion Phase

Social (Market)

The result of another survey: top five ways that investors had changed their behavior between 2000 and 2002

y

33%, I avoid companies I don’t understand.

y

31%, I do more research.

y

27%, I diversify more.

y

22%, I pay more attention to financial advisors. 15%, I worry more. Diffusion phase

Social (Regulation)

November 1, 1999 : the barriers of federal and state legal law were eliminated and the cracks in the walls opened

Gramm-Leach-Biley Act new financial affiliations through a holding company or a business subsidiary Successive mergers among leading players Create vertically integrated financial services holding companies

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Table 6.8 Evidences of Charles Schwab in 2007 supporting the framework of IISI Phase Detailed Challenges

Statements about challenges Statements about the method to overcome the challenges IT Acquisition phase

Technical Fidelity spent $2 billion each year on technology, 4 times of Schwab’s spending In 2004, spend $700 million in technology at its brokerage business alone

Strategic shift by technology in Schwab

y

Schwab’s business model had changed from a transaction model to a relationship model

y

Use technology to scale the number of customers and serve them effectively and efficiently - eschew the potential conflicts between what was best for the client and what was best for the company.

y

Focus on efficiency – Schwab reestablish its focus on productivity (after his return) ♦Between 2004 and 2006, the technology organization flattened from 7 levels of management to 4 levels. ♦Reducing the number of officers in the organization by almost 50%

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Table 6.8 Evidences of Charles Schwab in 2007 supporting the framework of IISI (Cont.) Phase Detailed Challenges

Statements about challenges Statements about the method to overcome the challenges Set-up phase

Organizational (competency)

a long history of using technology to offer efficient yet low-cost services to investors succeeded in maintaining its long-established culture – doing the right thing for customers Set-up phase

Organizational many of the company’s top executives had been left (the entire executive committee in 2003 had changed by 2006 except for Schwab and CFO Christopher Dodds) Set-up phase Organizational (competency)

Acquire CyberCorp and its subsidiary CyberTrader – Mar. 2000 (two months after buying U.S. Trust)

y

Aim: to provide CyberTrader technology to Schwab’s active retail investors, investment adviser clients and other institutional players.

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Table 6.8 Evidences of Charles Schwab in 2007 supporting the framework of IISI (Cont.) Phase Detailed Challenges

Statements about challenges Statements about the method to overcome the challenges Set-up phase

Organizational (competency)

Acquire Chicago Investment Analytics – 2000

y

A Chicago-based firm, develop proprietary stock analysis based on quantitative modeling techniques for institutional clients Schwab applied the system to its retail-focused equity rating system (Schwab Equity Ratings, launched in 2002) Set-up phas

Organizational (competency)

Purchase SoundView Technology Group – an equity research firm

y

Paid approx. $340 million

y

Meant to provide research to professional investors

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Table 6.8 Evidences of Charles Schwab in 2007 supporting the framework of IISI (Cont.) Phase Detailed Challenges

Statements about challenges Statements about the method to overcome the challenges Set-up phase

Organizational (competency)

y

Create a combined institutional research and trading capacity to compete with the major Wall Street Institutional capital markets players, such as Bear Stearn, UBS and Merrill Lynch(combine SoundView’s automated trading technology and Schwab’s market-making functions) Eight months later, sold capital markets business to financial firm UBS – the lack of synergy between the capital markets arena and Schwab’s core business. Take charges in excess of $100 million in the wake of the sale

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Table 6.8 Evidences of Charles Schwab in 2007 supporting the framework of IISI (Cont.) Phase Detailed Challenges

Statements about challenges Statements about the method to overcome the challenges Set-up phase

Organizational (competency)

New investment rating service (Schwab Equity Ratings system, 2002) – conflicts of interest concerning research analysts

y

Not hiring analysts to follow and evaluate companies

y

Employing Chicago Investment Analytics

y

Use computers to evaluate stocks according to quantitative metrics

y

Were assigned each week

y

30% of the stocks Schwab evaluated were assigned sell rating ( traditional Wall Street brokerage research departments only put sell ratings for 3%.)

y

Assigned each rated equity a grade of A, B, C, D, or F.

Unrepentant about the conflict inherent in the business models of his full-service brokerage competitors - a TV advertising campaign (2002) took criticismfrom its full-service competitors The advantage: since 2003, consistently feat all or most of the rankings produced by the top dozen Wall Street brokerages over a 3-year or 5-year periods.

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Table 6.8 Evidences of Charles Schwab in 2007 supporting the framework of IISI (Cont.) Phase Detailed Challenges

Statements about challenges Statements about the method to overcome the challenges Set-up phase

Organizational Steady increase in trading volume from institutional business the shift away dependence upon trading revenue allowed the company to drop the commissions

Gathering assets, gathering fees and interest: De-emphasizing commissions Set-up phase

Organizational (competency) Reduce the dependence upon retail trading commissions

Schwab Financial Products – a unique role at the company Create the high margin products that provide much of the profitability for each of the client enterprise By May of 2006, over $650 billion under custody (whole company in total, $1.3 trillion under custody by the middle of 2006)

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Table 6.8 Evidences of Charles Schwab in 2007 supporting the framework of IISI (Cont.) Phase Detailed Challenges

Statements about challenges Statements about the method to overcome the challenges Set-up phase

Organizational (competency)

Representatives’ ability: by expanding into advice and creating new products and services, representatives were able to be a host of investment products provided by other firms Set-up phase

Organizational (Competency -scaling experience)

Key challenge : to serve clients with less than $250,000 efficiently and effectively Let customer feel be served by a firm, not by an individual representative Some financial planners will take clients with them and open own investment management practices (somehow, Schwab Institutional benefited when the planners arrived in the network)

The importance of physical branches:

y

Most of new assets came in through the branches

y

Younger customers seemed reassured by the physical branches

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Table 6.8 Evidences of Charles Schwab in 2007 supporting the framework of IISI (Cont.) Phase Detailed Challenges

Statements about challenges Statements about the method to overcome the challenges Set-up phase Organizational (Competency- Schwab Institutional)

Sell U.S. Trust without damaging strategy “The need for Schwab to cover that high and wealth managementsegment through U.S. Trust went away.” (COO of Schwab)

The only one continued to grow even during the difficult conditions since 2000. Provide asset custody and back office operations to independent financial advisors. Diffusion phase Social (market)

The dot-com bust the drop in stock trading declining revenue falling share price

Charles Schwab returned to CEO for fixing the problems and refocusing the company he founded over 30 years ago: replace the former CEO in July 2004 Diffusion phase Social (market)

Commissioned trades were up 90 percent in Q1 of 2000 from the same quarter in the year prior. Co-CEO, Pottruck issue a letter of apology to customers for monumental wait times to reach telephone reps, trades failing to execute due to computer glitches.

Add 2000 services to the 7,000 in its 340 branches and 4 call centers Add a new call center, its fifth, in Austin, Texas

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Table 6.8 Evidences of Charles Schwab in 2007 supporting the framework of IISI (Cont.) Phase Detailed Challenges

Statements about challenges Statements about the method to overcome the challenges Diffusion phase Social (market)

Due to burst of dot-com bubble in 2000 The firm’s commissioned trading revenue dropped by about 50 percent from the beginning of the year to the end of August 2001. An average of 40,800 trades a day (1995), 242,000 trades a day (2002); 134,000 trades a day (2002), 101,500 trades a day (Feb 2003) Pottruck said “trading volumes are not going to go back to where they were in 2000, ever.” The company seemed to lose the focus on customers that had made the company a success.

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