The Business Of

Banking | Charles Schwab | What Do They Do?

Morning All!

Hope you had a great weekend. Last week, in the second part of our The Business Of Banking series, we explored the business model of Barclays. And we took a real deep dive into one of the most crucial revenue drivers for a bank - net interest income.

This week, for the final part of The Business of Banking, we’re going to move into the brokerage industry. And we’re going to look at a company that many people in the UK think of as the ‘Hargreaves Lansdown of the US’. As we’re about to see though, it’s slightly bigger than Hargreaves! It’s the US giant, Charles Schwab!

Now, I’m super excited for this week. Because Charles Schwab’s business model is so incredibly unique to anything we’ve really seen before on TBO. Today, we’ll set the scene and just go through what Schwab actually does. And by the end of tomorrow, I’m hoping we’ll all be pretty mind-blown! So without further ado, let’s dive in!

The Hargreaves Lansdown Of The US? Sort Of!

Okay, so as we said, Charles Schwab is a brokerage company in the US. But here’s a question - what actually is a brokerage?

Well, brokerages are basically middlemen that connect buyers and sellers. Let’s say there’s an individual in the US who likes the look of Tesla’s stock and wants to buy $10k worth of Tesla shares. How could they do that? Well, one of the most popular ways is by creating an account on Charles Schwab, depositing their $10k, and buying the shares on there!

The brokerage (Charles Schwab, Hargreaves, etc) takes care of finding sellers of Tesla shares so you don’t have to worry about it!

Now, as you can imagine, there isn’t just one person investing on Charles Schwab. In fact, there’s 34 million accounts on Charles Schwab’s platform! And the total amount of money across those accounts isn’t $10k… it’s a whopping $7 trillion!

Okay, so how does that 34 million figure compare vs other brokerage platforms? Well, the chart below shows us that Charles Schwab and Fidelity Investments are way ahead of the pack, with Fidelity marginally ahead of Schwab. But it also puts into context how large Charles Schwab is compared to other brokerages you may be more familiar with – like Hargreaves Lansdown (1.8 million accounts) and Robinhood (12.2 million)!

Why Just Be A Broker… When You Can Be An Asset Manager Too?!

Okay, so we know Schwab has millions of accounts on their platform. And multi, multi-millions of assets across those accounts. But here’s a question – where is all that $7 trillion being invested? Is it in shares? Funds? Something else?

Well, the chart below gives us the answer. Nearly 40% of those $7 trillion assets are in stocks (equities). Another 28% is in mutual funds. And 21% is in ETFs. And a very small sliver, ~5%, won’t be invested and will be in cash. Now, this 5% cash may not seem that important right now – but as we’ll see in tomorrow’s newsletter - this is actually super important! By the way, for readers who need a little brush up on mutual funds and ETFs – I recommend giving this article a read!

Now, stocks are fairly straightforward. People invest in shares of Tesla, Nvidia, Apple, etc. all the time. So it’s probably not a huge surprise that this is where most of the $7 trillion is invested. However, I want to just briefly touch on mutual funds and ETFs. Because whilst investors can go on Charles Schwab and buy mutual funds and ETFs from J.P Morgan or Blackrock or whoever else. They can also go on Charles Schwab and buy mutual funds… from Charles Schwab!

As you can see from the screenshot below, Charles Schwab offer their own funds! So, they’re not just a platform, allowing people to buy shares and other assets. They also have an asset management business (Charles Schwab Asset Management), where they offer their own funds. Tomorrow, we’ll look at how much revenue this asset management division brings in!

How Do You Make Money Handing Things Out For Free?!

Okay, so as we wrap up for today. There’s one other important point that will help set the scene for this week - and that’s commissions. Up until recently, commissions were the way that most brokerages used to make their money. And for some brokerages, that still is the main way.

For example, I have a Hargreaves Lansdown account. And every time I buy or sell a share on their platform, I have to pay a £11.95 commission to Hargreaves. However, as we can see from the comparison table below, Charles Schwab’s commission per trade is a lot less than £11.95… it’s $0! Nothing!

Now, I’m sure some of us are thinking – ‘hold on, if Charles Schwab is a brokerage platform that allows people to invest, but they don’t charge anything for that – can they really be making much revenue?!’

Well, listen to this. In 2022, Hargreaves Lansdown made a revenue of ~£735 million. In comparison, in 2022, Charles Schwab made a startling $21 billion in revenue.

So, how on earth do Charles Schwab make $21 billion in revenue when they don’t charge customers like me and you anything for buying shares? Well, that’s what we’ve got in store for tomorrow!

20th Nov 2023

Nigel Jacob CFA