Print | Close X

To Tell the Truth

He wanted to do good business and make money. But could he do it the honest way?

By Maria Bartiromo
From Reader's Digest

The Importance of Ethics

Trustworthiness can be underestimated when it comes to creating both success and wealth. But it is a critical trait in getting ahead. Just ask Charles Schwab, founder of the discount brokerage firm that bears his name.

The idea of never taking advantage of someone is a lesson Schwab learned early on from his father, then the district attorney of Yolo County, near Sacramento, California. "When I was young, my father taught me a lot about how important ethics are, about right and wrong, about doing the right thing and not compromising."

By his own admission, Schwab was "a hard-working kid." And for a long time he only dreamed of making money. "I've come out of a generation of parents and grandparents who lived through the Depression years, and all they talked about was not having money, the lack of money, the lack of resources, so from my earliest memories, I wanted to see if I could break out of that."

Schwab knew that education would be his escape route, but school presented inexplicable complications. "I got good grades in math and science, but in anything related to composition or reading, I was C-minus for sure."

The mystery would be solved decades later when his youngest son was diagnosed with dyslexia. Schwab says, "I realized that all of the difficulties he was going through, I went through too."

Schwab didn't consider the learning disability a handicap. "I worked harder to overcompensate," he says. "My SAT scores were pretty bad, but my enthusiasm, commitment and hard work were impressive. And because I had to work harder than the other kids, I had self-confidence."

That self-confidence asserted itself on the golf course, where he was a member of his public high school's golf team. When the school played Stanford University's freshman squad, Schwab shot 36 in his first nine holes. He won the notice of Stanford's coach -- and eventually landed a college scholarship.

After completing his undergraduate degree in 1959, he stayed on to go to business school. "It cost $335 a quarter. My dad helped, but I had to work. I worked after school, on weekends and during the summers." Schwab was employed by an insurance company, a bank, a financial-services firm. "They were a lot of junk jobs, but I made it a point to really understand the mechanics of the financial-services world."

He also learned the tricks that unscrupulous brokers used. "I saw the B.S. they gave clients to get the big, fat commissions," he said. Many followed the "363 banker" formula: They paid customers at a rate of 3 percent, loaned them money at a rate of 6 percent and were out of the office by 3 p.m.

Schwab says he "could see the nasty underpinnings at the very beginning. I had a spiral binder in which I kept all the stories of how they would pitch a particular stock. There was a great deal of 'inside information.' The broker would say, 'Well, I talked to this director and he said ...' Most of that 'inside information' wasn't worth its weight in feathers."

Within a year of graduating from business school and getting a job as a financial analyst, Schwab experienced his first stock market crash in 1962. He said to his boss, "All of our customers have lost a lot of money in this crash. We ought to be sympathetic to their positions. We ought not to charge these people for this quarter."

Schwab's boss was silent for about 30 seconds, then said, "You're fired."

Married and with a young child at home, Schwab couldn't afford to be unemployed. "I came back the next day, tail between my legs, and said, 'Look, I really need this job.' "

Deal Honestly with Customers



His boss rehired him, but Schwab continued to struggle to reconcile the conflict between doing what was good for business and doing what was right for the customer. For him, the ultimate test was whether an offering was something he would have his parents invest in.

Schwab had also come to realize a simple truth: "Clients will pay you money even when things are bad, as long as you tell them the truth."

That determination to deal honestly with customers became Schwab's guiding principle when he started his own discount brokerage business in 1974. He had just four employees and $75,000 in loans from family and friends. To this day, Schwab says, "some of my good friends still say to me, 'When you showed up, I was just wishing you weren't going to ask me for money!' "

Four years later, Schwab made a decision that was critical to the company's growth: He replaced the firm's boring, just-the-facts advertisements with those using his own image. "Putting my picture in the advertising put a face to the business. People felt there was a real person behind the whole thing, someone they could trust."

Results quintupled, then quintupled again. With each development, from the mass marketing of mutual funds in the 1980s to the Internet boom of the 1990s, Schwab's company came up with innovations to further empower individual investors. But the basic impetus stayed the same: "I just wanted to lower the prices and get better outcomes for investors," he says.

"Deep in my heart," Schwab adds, "I knew if I got more people to invest, it would be part of the great American success story and improve democracy. If people don't participate in wealth creation, we lose them as major participants in the body politic. I still feel it today. The more I can do to bring new investors into the success tent, the better off we all will be."

And FYI ...
Comments :

Print | Close X