Charles Schwab was a pioneer in the discount brokerage industry, opening its first office in 1975. By 2019, the industry had matured considerably. Schwab battled for brokerage clients with established competitors such as TD Ameritrade as well as young upstarts such as Robin Hood. Robin Hood had burst onto the scene in 2013 and was growing quickly through a strategy of charging zero trading commissions and offering user-friendly online trading platforms that appealed to millennials. In an aggressive response to this increased competition, Schwab shocked investors on October 1, 2019, by announcing that it was also cutting trading commissions to zero. Schwabs stock price dropped by 10% in response to the announcement. Meanwhile, competitor TD Ameritrades stock price dropped by 26%, as it was forced to follow suit. Many investors wondered how discount brokerages could maintain their profitability with the loss of this revenue source. Yet Charles Schwab himself was unperturbed declaring Eliminating commissions ensures my ultimate vision is realized making investing accessible to all.

In this case, you will analyze Schwabs 2019 financial statements to understand its business model and determine the financial implications of cutting trading commissions to zero. Using Charles Schwabs Form 10-K for the fiscal year ended December 31, 2019 (the 2019 fiscal year) along with extracts from TD Ameritrades 2019 Form 10-K, answer the following questions:

1. Summarize the key elements of Schwabs business strategy.

2. Summarize the major risks facing Schwab.

3. Identify Schwabs main sources of revenue and compute the percentage of total revenues derived from each of these sources.

4. The case materials also provide select 2019 financial statement data for TD Ameritrade. Use this information to compute the percentage of revenue derived from each of the above sources for TD Ameritrade. [Hint: Refer to the information describing TD Ameritrades revenue sources on the last two pages of the online exhibit].

5. Perform an advanced Dupont decomposition for Schwab. For this decomposition, treat bank deposits and payables to brokerage clients as operating liabilities.

6. Reperform the advanced Dupont decomposition of Schwab, but this time, treat bank deposits and payables to brokerage clients as debt. Which of the above two decompositions do you find most useful and why? [Hint: Review the information on page 35 of Schwabs Form 10-K].

7. Perform an advanced Dupont decomposition of TD Ameritrade, treating payable to clients as debt. Using this decomposition as the starting point, provide a comparative analysis of Schwab and TD Ameritrade. Which company has the highest ROE and what are they key drivers of the difference?

8. Based on your analysis, do you think that Schwabs decision to reduce trading commissions to zero was a good decision? Explain your answer.