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Charles Schwab CEO: 'No one does trading for free'

? As platforms offering free trading attract new users, Charles Schwab is not allowing any "meaningful" competitors to price below it, CEO says.

? Online brokerages need to "disrupt" themselves to avoid succumbing to pressures tied to new competitors' business models.

? Millennial investors are not the first generational shift retail brokerages have had to adapt to.

The retail investing landscape is in the middle of a transformation.

Millennials occupy a growing portion of the market. Commission fees plunged in 2017 after online brokerages including Charles Schwab Corp., E*TRADE Financial Corp. and TD Ameritrade Holding Corp. slashed their rates. And financial technology companies like Robinhood Financial LLC and Acorns Grow Inc. are challenging the models of the past by offering free trading platforms designed to bring in younger investors.

With those factors in play, Charles Schwab President and CEO Walt Bettinger II, who is now approaching his 10th year as CEO, has no hesitations about reconfiguring his company's approach to investing, despite its commanding market capitalization lead over many of its peers.

Bettinger sat down with S&P Global Market Intelligence at the Morningstar Investment Conference in Chicago to discuss free trading, the millennial investor and the broader shifting dynamics of retail investing.

The following is a transcript of that conversation edited for length and clarity.

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Walt Bettinger, president and CEO of Charles Schwab
Source: Charles Schwab

S&P Global Market Intelligence: There has been a flurry of fintech companies entering the retail investing landscape. Many are offering free trading on their platforms designed to woo millennial customers. What impact has that business model had on Schwab?

Walt Bettinger: I don't think there's a meaningful impact from any of these organizations that have tried to go in with very narrow product solutions. Our business model is so much more diverse and serves so many broader needs for an enormous population of clients.

It's not surprising that organizations would attempt to find niches in the industry. The challenge, I think, is that all those organizations recognize economically that it's difficult to start in a narrow niche and then broaden it out.

What has occurred to some extent is that larger companies that have had the courage to disrupt themselves have taken market share from other large companies that weren't as willing to self-disrupt. That's really where the market share movement is occurring. It's not within startups or the classic fintechs.

In early 2017, Schwab ultimately cut its commission rates for online equities and exchange-traded funds from $8.95 to $4.95 as a part of a broader price-cutting battle with its chief competitors. How does that pricing model hold up today, especially against the rising prominence of free trading platforms at companies like Robinhood and Acorns?

Bettinger: We're not competing on price — what we're doing is taking price off the table. We're not allowing any meaningful competitor to price below us.

With the quality of our brand, the quality of our service, the client experience we can deliver, if price is not a factor, then we will acquire significant market share.

No one does trading for free. It's just a matter of how you're paying for it. If someone offers trading at a $0 commission price then they're simply making it up in other manners. To say you're doing a trade for free is just disingenuous. If you're buying one share of Apple Inc., maybe you don't care that your execution quality isn't the highest it could be. If you're buying 1,000 shares of Apple, you care a lot.

These apps that are coming online are clearly geared toward a younger investor. In April, you mentioned that nearly 25% of Schwab's clientele is younger than 40 years old. How does a company like Schwab approach younger prospective clients?

Bettinger: If you go back and look at a strategy document from Schwab from 30 years ago, the No. 1 challenge facing the company was, "How in the world are we ever going to be successful in the future if we can't figure out how to serve baby boomers?"

[Everyone thinks] every generation magically somehow will have needs and wants that are dramatically different than the generations before them. But the reality is that it's not that stark.

Now, it's what you might pitch if you were running one of those companies and those were the kinds of clients you were covering. But I think it's extraordinarily naive. Life evolves.

When I did my first interview coming out of college, my 100% polyester suit probably dripped oil with every step I took. I probably wouldn't wear that suit today. The car I drove is probably different than the car that I would drive today. The idea that what makes sense for someone at 21, 22 or 25 [years old] is going to make perfect sense for them as their life changes is naive.

What exactly are millennials looking for in an online broker? Do those wants and needs differ from other generations?

Bettinger: Millennials have very high expectations on the simplicity and ease of the client experience, but so should everyone. Millennials have a higher expectation on transparency and understanding exactly what they're doing, what they're paying for and what they're getting in return for it — so should everyone.

If we're listening carefully to clients, it's really not going to be a generational issue.

As you head into your second decade as CEO, how do you position Schwab to fend off these growing fintech companies?

Bettinger: The organizations that do a more effective job of both listening to clients' needs and anticipating those needs will be successful so long as they have the courage to disrupt themselves. That will continue to be our strategy. There's no magic to it.

Most companies that have found themselves disrupted have done it to themselves.

Kodak invented digital photography. But they were so in love with the profit margins from film that they couldn't go there. Netflix didn't disrupt Blockbuster. Blockbuster refused to admit that the thousands of stores that they had built had converted from an asset to a liability. Airbnb isn't disrupting the hotel industry. The hotel industry is doing it to themselves by refusing to acknowledge that everyone's life doesn't begin at a 3 p.m. check-in and a 12 p.m. check-out.

We tend to get caught up in the firm that disrupted and lose sight of the fact that most of the time the entrenched provider did it to themselves because they were simply unwilling, unable or simply lacked the courage to do what they could see right before their eyes what the consumer really wanted.