In late 2004, Chuck Schwab looked me in the eye and declared that U.S. Trust was not for sale. It had been his idea to buy the trust-services shop, and he would see it through, he said.
In my book about Schwab, and in subsequent articles, I had suggested that responsibility for the troubled U.S. Trust acquisition rested squarely with former CEO David Pottruck, and that the U.S. Trust purchase was one of the main reasons that Pottruck was so unceremoniously fired in July 2004. But as Chuck and I talked in his San Francisco office in December of last year, it became clear that he wanted to correct the record on this point.
He even trotted out exhibit A: a newspaper clipping on U.S. Trust from Investor's Business Daily. Scribbled on the article in Chuck's own handwriting were the words, “David, let's check this out. Chuck.”
Many analysts had already concluded in 2004 that there was an unbridgeable culture gap between the populist and noisy do-it-yourself Schwab — forged 30 years before in the turmoil of deregulation — and the fourth-largest private bank in America, which since the 1850s had quietly pampered the wealthiest people in the world. Many voices suggested that Schwab get back to basics and sell U.S. Trust.
But Chuck would have none of it. On some level, of course, it made sense for Schwab to add a wealth-management franchise to its portfolio. At the height of the dot-com boom, Schwab managers were going crazy because thousands of the firm's richest customers were abandoning Schwab for private banks like J.P. Morgan and U.S. Trust. The more successful the investors became, the more they needed the kind of wealth-management services that Schwab simply didn't offer.
“We had 175,000 millionaires in 1999,” Chuck told me. “Many of them were getting further along in age and had new issues and needs for things like fiduciary services, trustee services. And we didn't have anything for them.” The only alternative to losing them as customers, he said, was to provide them with a tightly integrated, seamless transition to wealth-management services — a la U.S. Trust.
Throwing in the Towel
Alas, Schwab underestimated the difficulties of integration. Management conflicts and technical troubles were just part of the problem. A bigger failing was that U.S. Trust's product mix could not keep pace with the evolving needs of the wealthy.
Now, six years later, Schwab has finally thrown in the towel. In November, the firm agreed to sell U.S. Trust to Bank of America for $3.3 billion in cash. (Schwab bought the company for $2.7 billion in 2000.) The sale includes 13,600 clients and $94 billion of assets under management.
What now of Schwab's determination to keep wealthier customers from bolting? Schwab's best hope is that many of the financial advisors in its wide network have evolved wealth-management practices that will keep wealthy customers happy and in the Schwab fold for many years. In the meantime, the financial-advisor strategy has put Schwab on pace to deliver its most profitable year since the company first began to offer discount commissions in 1975.
The sale of U.S. Trust is not surprising, but its sale to Bank of America is a small irony. In what Chuck describes as the worst business mistake of his career, he sold his company to Bank of America in 1983. Less than four years later, Schwab bought it back in a $280 million management-led buyout.
There's an old saying that victory has a thousand fathers but defeat is an orphan. In 2004, Chuck insisted that he was the daddy of the U.S. Trust adventure. But what would he say now? When he was fired, Pottruck signed his goodbye letter to the staff, “David S. Pottruck: private investor, Schwab client, U.S. Trust client.”
John Kador, the author of 10 books, published Charles Schwab: How One Company Beat Wall Street and Reinvented the Brokerage Industry in 2003.