November 24, 1997

I became a Schwab customer in 1989. At that time Schwab was meeting my needs as a customer. I wanted the least expensive commissions, the ability to make trades with a broker over the phone within a few minutes, and no investment advice. Between 1989 and 1993 my relationship with Schwab was excellent. However, in 1994 I started having numerous problems with Schwab's customer service and Schwab's corporate offices.

From the first time I bought a stock I noticed that the spreads were high, for example, bid $9 1/4 asking $10 1/4 or bid $3 asking $3 3/4. I would write companies, the NASD, and the market makers themselves asking why the spreads were so high, but I got very few replies and those that I did get didn't answer the question. In 1994 I would read that someone at a university did a study and the study showed that the spreads on NASDAQ listed stocks had very high spreads in relation to stocks on other exchanges. The study woke up the NASD and NASDAQ, small investors were suppose to get better pricing due to narrower spreads and they were suppose to be able, at times, to "break the spread." Breaking the spread refers to getting a better price for a market order. That is, if you place a market order to buy and the current ask is $10 1/4, the broker is suppose to get you the best price, if another market maker is offering to sell at $10 1/8 you are suppose to get that price (don't confuse breaking the spread with a limit order, a limit order is just waiting for the bid and ask prices to change, go up or down, breaking the spread is getting a better price right now, this instant).

Months went by and I had never gotten a better price from any trade that I placed with Schwab. I was still just getting the quoted bid and ask. I wrote Schwab in April and July of 1994 asking them why not, why was I not being allowed to break the spread? I never received a reply. To this day I have never broken the spread with a NASDAQ stock that I bought from Schwab. Also in May of 1994 I wrote Schwab asking where I could find short interest and insider trading activity for a company, again, Schwab didn't provide me with any useful information regarding my request.

I continued to support Schwab and even continued to recommend them to my friends. I didn't like the fact that they never broke the spread, but I was still getting my main needs met. I was still getting what I considered good commissions and was able to place trades with a broker in a reasonable amount of time. As far as getting information like short interest and insider trading activity I found an alternative source for that information.

In 1996 I would start to become what I called a heavy trader, trading up to twenty times a month. Web trading would also start becoming very popular. I was paying, on average, over $40 a trade for commissions when other companies were offering trades for less than $20. On top of that, Schwab was becoming slower and slower at executing trades. I would wait longer to get through to a broker, many of the brokers were inexperienced (Schwab said that their business was growing so fast that they had a hard time finding good brokers), and Schwab customer service in general was not that good.

In 1996 and 1997 I had numerous problems with Schwab. I changed my address and it took three phone calls for them to finally get it done. I traded thinly traded options and many times Schwab couldn't even get me a quote. I had problems with their telebroker service. I had problems at the local branch office, I had only talked to an investment specialist once before in eight years and the second time I did the specialist ask me to please hurry up because they could see other customers waiting in the lobby. I had a problem with a trade confirmation, I received a trade confirmation in the mail, later Schwab would revoke that so-called trade confirmation and give me a lower price even after the original price was confirmed in writing. I placed a limit order for the first time, I had not place a limit order since I began trading because I had heard that many times with a limit order, especially in a fast moving market, many brokers would not get the order executed at the specified price, that's exactly what happened to me, the price I got was about $300 less than the limit specified price, when I asked Schwab they said they did it the way they were suppose to and if I wanted a "print out" to prove it, I could get it, I requested the print out, but never received it.

In 1997 it was clear to me that Schwab's service was declining. It was now impossible for me to justify paying over two times the average commission and I started moving my money from Schwab to E-Trade. Overall, E-Trade service wasn't any better than Schwab, but at least I was paying less than $20 for trades. I gave Schwab every opportunity to give me a better price on commissions and/or better service, but as far as I'm concerned they never did either. I still have some money left in a Schwab account, but as I sell the securities that I have left, I will transfer the money to another company.

I want to better explain Schwab's commission rates, the rates I was paying. Virtually every trade I made with a Schwab broker was over $40. There are now many companies that you can trade with through a broker for less than $20, Schwab's commissions are over 100% greater. My last five trades with Schwab were through the WWW, the commissions I paid Schwab were all greater than $35. There are now many companies that you can trade with through the WWW for under $10, Schwab's commissions are over 300% greater. The best commission that Schwab could offer me was through ESchwab, the commissions would be over $29 and they specifically told me that in that account I could only trade through the WWW, that is, if I didn't have a WWW connection available I couldn't make a trade. There are now many companies that you can trade with a broker, the phone, or the WWW, and their commissions are less than half of what Schwab charges. In my opinion, the commissions rates of Schwab are ridiculous in today's marketplace. I believe the only reason Schwab is getting away with this is because they are a marketing machine, they are not increasing their market share through improving prices and/or customer service, but through advertising.

One final thought. I'm not trying to convince anyone not to use Schwab, I'm simply sharing my personal experiences with you. Schwab is not about to tell you or admit to their failures, nor will the financial news media (Schwab spends millions of dollars advertising on TV, in newspapers and magazines, and on the WWW.). I hope that in the future more and more customers will share their personal experiences on-line so we can all learn even more. What we get now is so biased that it doesn't really help that much.

ADDENDUM (April 27, 1998)

In the May 4, 1998 issue of Business Week on page 127, BW says, "Schwab's $30 commission is starting to look high to him. 'There are places where you can trade for $8 and have as good a trade as for $30,' he says. [an investor being interview]." From the very same article on page 134, an investor being interviewed by BW says, "With my Schwab account, I can take a position in a stock for, say, $30. At other places, the commission could be $300 to $400. I can sell a stock, then buy it back, and I don't feel like it's costing me an arm and a leg."

This really shows you how people look at things differently. I'm sure Schwab wants you to compare his prices to those $300 and $400 commissions.

If you want to check out the overall broker industry I would not use the so-called unbiased opinions of rating services such as Gomez Advisor's.

ADDENDUM (October 22, 1999)

Today many customers could not log onto their accounts through the web. When you tried to use Schwab's telebroker through the phone, you were greeted with a voice that told you telebroker was down too, and you must call Schwab and talk with a rep to do any trading or even just to get quotes. When you called Schwab to try and talk to a rep you were greeted with a voice that said due to very high call volume (even though it was a normal volume day for the markets) the delay to reach a rep will be at least 10 minutes (you notice how they tell you at least, you know you will be put on hold for at least 10 minutes, but it may be 20, or 30, or who knows how long). The voice goes on, however, our automatic services are available immediately. Wait a minute I just tried your automated services and they told me to call you, maybe I just didn't hear right, so you call telebroker again, but telebroker tells you the same thing, to call Schwab and talk to a rep. So you call again, but same voice, same message. This time even though you want to make a trade you would settle for just getting some quotes so you hit the one like the voice told you, but wouldn't you know it, another voice tells you the computer is down and they can't help you.

You notice how Schwab puts their customers in this endless circle, making customers call other phone numbers and to press other numbers only to be greeted with another message that says were sorry. I wonder what Schwab would do if you miss a payment for a security you bought, but told them you were sorry.

Just for the hell of it, called again, only this time you hit 5 which is for new customers who want info on opening an account. No problem here, in less than 30 seconds you are talking to a Schwab rep.

Later on CNBC you hear this is the third time this week Schwab has been down.

You are constantly told by Schwab how important you are as a customer, but whenever things get a little hectic, high market volume days, Schwab changing software, etc., Schwab is about as lost as a duck in the desert when it comes to handling the situation.

For someone who needed to make a trade today, and may have been losing thousands of dollars as Schwab played with their computers, it's got to piss you off.

ADDENDUM (November 1, 1999)

From Reuters:

"Monday November 1, 7:41 pm Eastern Time

Schwab to offer rich clients access to pre-IPOs

SAN FRANCISCO, Nov 1 (Reuters) - Charles Schwab Corp. (NYSE:SCH - news), the world's No. 1 discount brokerage, said Monday it would offer wealthy clients the chance to invest into private companies that are planning to go public.

Schwab said it would offer clients the ability to make such private-equity investments through a partnership it had struck with OffRoad Capital, a San Francisco-based financial services firm.

Investors who want to invest in these pre-IPOs, however, must have $1 million or more in assets in accounts held with the discount brokerage, said Greg Gable, a Schwab spokesman.

The Securities and Exchange Commission limits such types of investments to so-called accredited investors, people whose net worth equals or exceeds $1 million. But Schwab raised that bar further by limiting the investment option to clients who hold $1 million or more in assets in Schwab accounts alone.

``These are investments designed for affluent customers,'' Gable said. ``They are high-risk investments, so there needs to be that break-off in terms of applicability.''

The idea is that investors could buy into private companies with plans to go public within a certain time frame. That way, they would have some way to take part in the eventual IPOs of many of the companies and sell their shares, giving them some liquidity down the road, Gable said.

OffRoad Capital is able to gain access to such investments through an agreement it has with Robertson Stephens, a prominent U.S. securities firm based in San Francisco."

It's interesting how the financial news in this case, Reuters,calls Schwab the world's No. 1 discount brokerage. In the 80s, Schwab's big pitch was to give clients the cheapest commissions and I know from personal experience, they gave little more than that. However, since that's what I was looking for, the cheapest commissions, I went with Schwab. Now Schwab has the most expensive web trading commissions I know of, but the financial news still calls them the No. 1 discounter? (The term "discount" in reference to the brokerage industry specifically refers to the cheapest commission price, that is, it does not imply the cheapest commission price which includes research, friendly brokers, and etc.)

ADDENDUM (February 11, 2000)

I just read where Schwab has increased the initial minimum equity requirements for margin accounts to $5,000 from $2,000 effective February 12, 2000. Why did Schwab do this? Was it for Schwab's customers? No, it's for Schwab, Schwab is about profits first, customers second. Do I have problem with that? No, but if I was a Schwab customer and was affected by this increase, I would tell Schwab to quit pissing down my back and telling me it's only raining.

ADDENDUM (April 9, 2000)

In the past two years, spreads have decreased, but it's only because the volume levels have increased so much. If a market maker (Schwab owns a market maker) trades 1 million shares at a half point or 5 million shares at one eighth point, they will make more under the latter. Market makers don't care how they make their money; off the spread or off the volume, they're now making it off the volume.

Here's some quotes from a note I got from Schwab yesterday:

"Charles Schwab is committed to providing the best execution for your trades. In determining where to route equities and listed options orders for execution, Schwab seeks to obtain for its customers the most favorable terms available among the markets and firms trading a security."

"Most orders for exchange-listed stocks in which we make markets are routed to our affiliated specialists on the regional stock exchanges. Most orders for OTC stocks are routed to our affiliated market maker, Schwab Capital Markets L.P. (Members SIPC/NASD) [I wonder what 'most' specifically means: 20%, half, or 99.9%]."

"'Payment for order flow' is a common and widespread industry practice [so that makes it okay] in which brokerage firms receive monetary and non-monetary [I wonder what non-monetary is referring to?] compensation when equities and options are routed to a particular specialist, exchange, market, or dealer [not necessarily the one who gets you the best price]. Schwab receives an inter-company transfer of funds in connection with orders routed to our affiliated market maker. Schwab also receives monetary compensation from, and participates in, the profits of certain affiliated and independent exchange specialists who execute our equities and options orders. In addition, Schwab receives compensation as part of reciprocal order routing arrangements with various exchange specialists and dealer firms, and receives rebates and credits against fees paid by Schwab to various exchanges."

You can decide for yourself after you read your broker's information about order routing policies. Do you still think you're getting the best price when you trade a stock. But who cares, as long as the market's going up?

ADDENDUM (April 13, 2000)

Today Greenspan gave a talk. One of the questions Greenspan was asked was do you think the small investors know about payment for order flow and the fact that they may not be getting the best price? Greenspan just gave a general answer, probably not, but he didn't have any exact numbers.

Did the senators or Greenspan talk about what they could do to make sure customers did know? No. Did the senators or Greenspan remark that the fact is even if the customers did know, there wouldn't be anything they could do about it anyway. The vast majority of brokers are more worried about getting payment for order flow then getting the best price for their customers.

With some great buys out there now I wanted to buy some stock, but first I had to get some cash into one of my brokerage accounts. I decided to put money into my E-Trade account.

I drove to their offices in Palo Alto and wouldn't you know it, the office gate was locked. Since they are committed to customer service they locked up this office which had a person to talk to and started a self-service office at a different location.

The map they had available to find the new office was done by an employee who was committed to the best customer service. I know they were committed because I couldn't read the map. The employee used a copy to make copies so many times that by the time I came by, the map that was available was no longer readable.

There was another employee committed behind the gate and I asked him for directions, I got the directions and asked him if I can drop a check off there. He replied, "I think so."

I finally got to the new location and dropped of my check, even dropping off the check at the head office still takes three business days to get the money in your account. I wonder if NASDAQ would take three days off so E-Trade can credit my account, if I asked them to?

Why am I talking about E-Trade in this Schwab file? Just to let you know that finding a broker is basically picking the least evil one. If you want personalized service, fast execution, the best prices as far as spreads and commissions, intelligent employees, and responsive customer service you are not going to find it all at one broker.