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00:00So when did this brilliant idea come to you. Set up a brokerage firm. Brokers was built upon how well companies could make money and not how customers really want to do business. Your ads in your company for many many years have featured your face . My director of our advertising said why don't we use your pictures sometime. Are you kidding me. We tried one. The results were up by tenfold. Do you have any stock tips for me . Stock tips have many good ideas. I could do with my money on the stock market. How about an index fund . Would you fix your tie please. People wouldn't recognize me if my tie was fixed but it just seemed so sweet . All right . I don't consider myself a journalist and nobody else would consider myself a journalist. I began to take on the life of being an interviewer even though I have a day job running a private equity firm . How do you define leadership . What is it that makes somebody tick . We're here today with Chuck Schwab who is one of the best known figures in the American business world. Certainly has been so over the last several decades because of his ubiquitous face and his ads but also because of the great company he's built which is one of the leading financial service companies in the United States. He has now just written a book called Invested by Charles Schwab. And we're to talk about that and his life which is quite incredible. But let me start by asking you about something you made news with just recently. Your company announced that you're not really just going to do discount brokerage. You're going to give away brokerage for free. In other words if I want to buy some stock. I call up Schwab I have an account and I trade for free. How do you make money . If I'm trading for free. Well David first thanks for having me on your show. Have the opportunity to know you for a while. So I feel very comfortable being here and letting you know all my secrets. All right. Tell me the secret of how you make money when you're not charging. Well a long time ago we started taking commissions down and that's how we started the business with lower prices along the way. And finally we got down to four ninety five. I said we're so close to zero. Let's go there. And I always had a somewhat of a passion for what the success of Google has been. They made search free and they do very well by offering free search. All right. Similar in our case we think we will do very well offering our services free for transactions. And that's the commodity part of the business . The rest of us we give people if you need help and advice on different kinds of things manage accounts banking all those kinds of things. But the fundamental service we want to provide is free. So I shouldn't worry about Chuck Schwab not making money because you're giving. Sure should not worry about it . OK. We actually are giving up about 4 percent of our revenue . That decision. So for those who don't really follow this you started as a discount broker where you're giving lower commissions than the standard rates were before today. You've become a conglomerate in fact in the financial services where you have about three point seven trillion dollars of assets under management. So you make your money on other financial services is that correct. Correct. But you know one of the things we are a conglomerate. We're really not in the original sense. We only focus on what we do for individual investors and advisers who have individual investors. So when you started doing this more than 40 some years ago did you ever envision that you would be in more than a discount brokerage business to say I want to build a gigantic conglomerate or not. I did not . David I mean certainly we had a very limited view of where we were at the time. But frankly we thought the original business only had a would help maybe 10 or 15 percent of the population. People would did their own research and only one to have a simple transaction. As we found out there are many many people wanted to help and advice. So let me ask you about something that some people say makes you so well-known. Is that your ads in your company for many many years have featured your face. I started Charles Schwab and Company from the investor's point of view. I invite you to find out more about Schwab today. Now was that something you cited you wanted to do. David it started out . Obviously our company started with a shoestring. We didn't have much money. And I had a tough time raising money because Wall Street certainly didn't want to help me develop competition for them. So as a consequence I our ads were really tinny when we first started the business in 1975. Would be one column by three inches come. Save seventy five percent on your SO people kept coming into our company and as we grew over the next couple of years we have had some profitability along the way. We were growing very nicely once we had a nice article written in the same school examiner about us. They used a picture of me lean over as you remember the old bunco ramo machines. And there I was and my director of our advertising said Why don't we use your pictures time. It'll show there's real people here. I say Are you kidding me. What's my mother's going to say. What's my father going to do. What's my wife going to say. And my friends. Some kind of ego maniac . And I said finally convince me after some conversation he said just try one. We tried one . The results were up by tenfold because I think people thought there's a real person behind this business and I can identify him. I certainly looked for him in the post office. He's up on the wall there. I don't do business with him . So I think that helped. And so anyway my friends got over it . But when you go walk downtown in San Francisco or anywhere in the country but Selina Wang Cisco can you walk without having people say there's Chuck Robb and come up and ask you for some advice or something. Yes. Well it happens on occasion which I'm always honored to have that happen. But for the most part people don't really recognize me. And some said maybe I part my hair differently. So when you were starting the company in the early days if somebody called up and said I want to buy 100 shares of IBM you had a broker he or she would write down 100 shares of IBM. They then do something to go to the stock exchange teletype. But to the exchange IBM I raise red herrings and teletype etc. to the central place in New York execution . We reverse a little thing called the kind of bag. You bought a hundred shares of IBM at fifty dollars a share. And that course very early on we were very early adopters of a lot of technology to make ourselves more efficient. We just had to do that. And fortunately I was close to Silicon Valley. Many my friends were people in the valley itself. And I was an early adopter. And so we were one of the very first ones to sort of adopt the Internet in nineteen ninety five. I think it was one of the ways you got customers from all over the country. You had something in your mind to do branch offices. Why did you want to have branded IBEX. We found out early on very early on that about at that time about 50 or 60 percent of our customers wanted to come into a branch and make sure that real people there were behind the counter that they could see that. And so our numbers once we opened our office in a location our numbers went up substantially . So you had better technology perhaps you spent more money on technology and others. You had your face which everybody got to like and you also had the branch offices. But there's one other thing that really made your company grow from reading your book it seems to me is that you decided to do more than discount brokerage . You came up initially with an idea in effect having people buy mutual funds through your platform. That was a big innovation . Can you explain how that works . When I first started this mutual fund was sold by salesmen obviously got big commission for doing up to 9 percent of the money invested went to commissions and the salesmen got half of that will say I thought no load funds with no commission was the best. Wait for an investor to go about investing which I use some of the early myself personally through my IRA account. I said This is crazy. Why can't I offer this service to everybody . Had no load kind of transaction thing. So we went to the no load companies. They're all small to give us a little piece of your management fee and we'll offer you your fund for free to our whole network of Schwab clients and clients loved it. So you were the CEO for from the beginning and then eventually you had a CO CEO and then the casino had a heart problem and he had to step back and then you brought somebody else in. But you at one point kicked yourself upstairs a little bit made yourself chairman. I did. And then somebody else was running the company and then it didn't work out . So then you came back in for three years to run it again. Was that something when the door came back in. I wasn't sure I wanted to but obviously I loved the company so much. Came back in 2008 . I retired again as CEO and Walt Bender take over and done a fantastic job for the last 10 or 12 years. And so that I'm always sort of hanging around as the comforts of the company . Thank you. Push the people. We're going this way. It's north . So when you graduate from Stanford Business School and you say I'm going to go join a private equity firm or a hedge fund as a kid I want to find out how could I become successful. So I found financial services was a way to go . So one of the causes you have is something that I'd like to talk about you've been very open about it unlike many people that have this problem it's called dyslexia. Right. And for those who aren't familiar with it it basically means it's difficult for you to read in the conventional way that the average person can read. But the amazing part in your book as you describe it is that you had it for much of your life and you didn't know you actually had it right. Can you explain that. Our youngest son was about seven or eight. We had him diagnosed because he had as it turned out all these similar identical issues I had as a young student all the way through school. He was now just only seven. He had it all the way through the rest of his career . And it was a really aha moment for me to understand. Yes we he got it through obviously DNA. And as a consequence I got into it. We both got into my wife and I and we started an agency to help other parents who had identified kids with this issue . Turns out one in seven people have some related issue around dyslexia some learning difference. So when you're young and you are dyslexic and there's no term for it yet or least you weren't diagnosis that did you just think you weren't that smart or your parents think well he's not that good a student. And how did you actually get through school early on. I read a lot of comic books read classic comic books. They had the picture and a few words. But I got all the stories whether Moby Dick or Tale of Two Cities. I was a wonderful student in the classics but I got through comic books. But if you're dyslexic or somebody is dyslexic there's one compensate by hearing better observing better or being very good in math as you are. I think it's a phonological issue. Fundamentally it's what it is as conversion of code code to sound and then to meaning. And then the reverse is true for writing . And because of that defect in our brain we are slow readers. You were not a great student I guess because of dyslexia in high school. But you've said in your book that maybe you got into Stanford because you were a pretty good golfer. Have I got to offer. I don't think it makes the academics too happy that I got into Stanford anyhow . But the fact was the coach was looking for some talent in the golf area. Did you play golf at Stanford. I did play golf . And it soon only as a freshman. Only for a period of time. And I almost flunked out. Was that what happened. Because I was not prepared for college at that moment. You graduated from Stanford. You went to Stanford Business School and you did pretty well in Stanford Business School. Yeah I did. So when you graduate from Stanford Business School did you say I'm going to go join a private equity firm or a hedge fund or what did you do. I always wanted to do research as a kid. I wanted to find out how could I become successful. That was important to me because I came through the depression years my parents did. And I wanted to sort of make money and get the resources to have choices my life. So I moved off found financial services was the way to go. So at age 13 or 14 I began to think about this thing stock market. Then I went to Stanford Economics Business School of Financial Investment Management all that in my early career. And then I worked after and during business school for a small advisory company. I was a research analyst portfolio manager and I had the responsibility and the introduction to many brokers would come and sell us their stories. So I got to know the fundamentals were how Wall Street functioned all by sales commissions and some were bad incentives. All right. So you're doing investment reports but then eventually you realize I guess that you're not going to get that wealthy writing investment reports. So when did that brilliant idea come to you to set up a brokerage firm in a discount brokerage firm. Well Assad really in the early 70s I saw how how difficult this business was built upon brokers would build upon how well companies could make money the brokerage companies and not how customers really wanted to do business. So as it became in the conversation in 73 74 Congress S.E.C. all thought that the commission system was really not a particularly good one particularly a fixed rate thing. And so the big beginnings of the end of that started that in 74 with the test period and then seventy five boom we went to Mayday. So when you wanted to start the company did you just go down to Silicon Valley and say to a venture firm hey give me some money I got a startup idea . No there was nothing like that available to us. I would have to go to friends for a little bit of money. And some people in Wipro who thought my business was great. And that course eventually led to our deal with the B of A. To them to borrow money they liked our business models so much of the time they decide try to buy our company. And I came from nothing as I mentioned. And so they enticed me to sell the company to be a . I thought that was a great thing and would enhance our reputation as a discount broker that we were associated with the BBB the largest bank in the time. And that was then four years of that before I bought the company. Sounds like a great idea at the time. B of A which is the epitome of the establishment is buying this little kind of renegade company which is not the establishment. You not only sell it for 52 million dollars which strikes you that out of money. A lot of money. And also you got to a board of Bank America. And I think the age of 43 something like that where the youngest person on the board and one of the largest shareholders the largest individual shareholder the youngest person the board the establishment is there. And you don't regard yourself as the establishment. So what can go wrong with that. Sam it sounds great. Well it's great then. But then the bank fell on some bad times. We couldn't continue to do our progression of new services. For instance when one case we couldn't even develop our own money market funds because the bank had to get permission because they were in trouble by their operational issues and loan loss issues that we couldn't get the Federal Reserve to approve us to to do our own money market fund. OK. And I thought it was time that we should get out of the company. Well you had one advantage in buying it back. I think you had the right to your picture. I did. I had a name and likeness went with me and they could sell the companies. We finally came to terms. Who was the clever lawyer that told you to keep your name separate. I know. I thank him every day. So you bought it back for let's say 250 to 300 million dollars more or less. And so how did you feel. You bought it. You sold it for 52 million but you then had to put up 250 to 300 million to buy it back. And you have to put up a lot of your own money to do it. David. Back then the valuation when I sold the company to be a better sell for about three times revenue when I bought it back. I bought it for three times revenue. So it was about saying we've just grown that much in that time period. So it was a fair deal for them when they I sold and a fair deal when they sold to me. But you did it what's called a leveraged buyout. And you were advised by one of the leaders of the leveraged buyout industry then and now George Roberts from KKR. And so you had a lot of leverage in those days. Leverage was higher than it is today. So you had a lot of your net worth tied up there. You also had a lot of debt ahead of you had all my net worth and then some. So you decided to try to deleverage pretty quickly. And in the same year you bought it back. You decided to go public. Go public. I did . That was pretty courageous. Did anybody tell you that was not a good idea . A lot of people I said I needed to do it. I did deleverage as quickly as I possibly could. And fortunately we did because shortly after going public we had the crash of 87. And that was another complication. Did that affect your business at all. Of course it did. Our stock dropped from 15. Was the IPO price right on down to six. So your net worth went down a little . Yeah more than half. It didn't bother me. Because we still had the company still had the opportunity . And having been a student of stock market cycles I knew we would eventually return to more normal times. As you look back on your career the most important lesson you've taken away from what you've done is to innovate. Pay attention to technology . Be nice to people . Have a team of people that you really honor that work with you because you could do so many more things. Other brilliance around you . So your company now has a market value that is staggering compared to what it once was. I think your market value is about fifty six billion dollars. So something that neighborhood 56 billion dollars. And you are the biggest single individual shareholder still. Yes. So you have a net worth yourself . That's fairly high . What is your view on the wealth tax. Do you think that a wealth tax is going to make society better or not. Or how do you look at it as somebody like me that is subject to criticism for not supporting such a tax. Well I think it's sort of wrong directed in many ways. I think we as a society and you probably don't talk about it as much. I don't either. About our philanthropy . And I feel that's an obligation of all of us. I came from really nothing and was had plenty of incentive to create. Well we've created in course my wife and I have spent a lot of time over the last 20 years giving back money to different causes that we really think need improvement for this education or the art world or Alzheimer's issues you name it. We are probably supporting that. So you're a pretty famous face and obviously a famous person. So in California when you're famous sometimes you say well I should run for governor senator president . Did you ever think of running for anything. I was suggesting the appointed secretary of treasury one time under the Bush administration. I thought I just can't do it. I can't put everything in some trust and so forth. And I really felt that this was my purpose in life. Developing a company like this is that we have benefits. So many people to politics wasn't really my. Maybe if I was king I like to make I guess I like to make the things happen quickly. So today the way you view your contributing to the country other than paying taxes building a big company do you spend any time advising government officials or do you do other things than relating to government. Well I'm obviously very actively involved in politics. I think every individual in America should have some peace and the outcome of this country and hopefully will hang on to free market systems for indefinite periods of time is provided for all of us. The in all the various benefits of creation of new things along the way. And that was I think that's what we're doing. We're at the heart and soul of free enterprise. And if you look back on your incredible career you say I made a mistake or two mistakes . What would you say is the biggest mistake you made that you think if you hadn't made it you'd be even more successful. Well I think David I've made a lot of mistakes and every mistake along the way I think I've learned something from that . So you have the benefit of having now five children. Yes. And 13 13 grandkids. Hey so what a great chapter in one's life. Do your children or grandchildren ever say you know can you give me a stock tip or something because I got some money. I think you wrote I think your oldest daughter once she asked you for some stock tips and you just told her just diversify. Well I did but I. We have a mutual fund access index fund called the Schwab 1000. I use that all the time from my kids the ETF portion thing. I've taught them all about it. But in some respects it's a little bit boring. I rather have the kids by individual stocks. So what I'm going to do coming up this spring we're going to introduce four actualization of stocks so you can buy a small fraction of Facebook or Amazon. Amazon has a high price on Amazon. Let's say it's trading for thirteen hundred dollars a share. Some people can't afford it. Thirty nine dollars a share. They could buy about 130 dollars. How about other Kailey Leinz worth. OK so that's something you're going to be doing and doing for the young people. OK so as you look back on your career the most important lesson you've taken away from what you've done is it to innovate. Pay attention. Technology . Be nice to people. What would you say is the key lesson. I think you have enough humility in business that extract and and have a team of people that you really honor that work with you because you could do so many more things with other brilliance around you. And I think that's one of the best things that I've taken away from business. Having throw your ego aside and get with it and a team really appreciate you honoring that. Now by the way before we close do you have any stock tips for me. A couple stock tips. You have many good ideas of I could do with my money on the stock market. I think maybe other considering I know Carlyle a lot and you've done a fantastic job. How about an index fund .

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The David Rubenstein Show: Charles Schwab

Charles Schwab, chairman and founder of Charles Schwab Corp., talks about letting customers trade for free, overcoming dyslexia and how he became the face of the company. He appears on "The David Rubenstein Show: Peer to Peer Conversations." The show was recorded Nov. 12, 2019 in Washington. (Source: Bloomberg)

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