Scottrade, Inc.

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Scottrade, Inc.

12800 Corporate Hill Drive
St. Louis, Missouri 63131
U.S.A.
Telephone: (314) 965-1555
Toll Free: (800) 619-7283
Fax: (314) 543-6222
Web site: http://www.scottrade.com

Private Company
Incorporated: 1980 as Scottsdale Securities Inc.
Employees: 1,593
Sales: $750 million (2006 est.)
NAIC: 541611 Administrative Management and General Management Consulting Services; 523110 Investment Banking and Securities Dealing; 523120 Securities Brokerage; 523920 Portfolio Management

Scottrade, Inc., is looking for greater name recognition. Founder Rodger O. Riney and his family have majority control of the stock brokerage, which grew leaps and bounds with the advent of online trading but has remained relatively obscure. Scottrade has managed to remain independent in a heavy period of consolidation in the financial services industry through successfully linking low-cost trades with a large branch-office system. Consistently earning a high degree of customer satisfaction, the operation has been able to stand up to much larger competitors.

BUILDING FROM THE GROUND UP: 1965–95

A gift of stock from his grandfather planted within Rodger Riney a seed of interest in the stock market. He would take that seed and grow it, as Gil Stuenkel wrote in a 2000 St. Louis Business Journal article, into "one of the biggest entrepreneurial successes in the discount brokerage industry."

A self-described "math guy," Riney earned a B.S. in civil engineering and an M.B.A. at the University of Missouri, the Wall Street Journal reported. However, he developed skills to grow his business at Edward D. Jones &Co.

Beginning in 1965 as an unpaid intern, Riney would go on to revamp the Pueblo, Colorado, office, establish the company's personnel department, and by his late 20s, earn a general partnership. A true believer in the discount brokerage model by the late 1970s, Riney struck out on his own.

Using personal assets, Riney established Scottsdale Securities Inc. in 1980. The Scottsdale, Arizona-based discount brokerage, serving individual investors, soon opened branch offices in St. Louis, Missouri, and Phoenix, Arizona. Riney relocated the headquarters to his hometown of St. Louis, Missouri, in 1981.

During the early 1980s, the small company fought to gain a foothold in the competitive market through offering deeply discounted services. Scottsdale Securities opened a third branch office, in Dayton, Ohio, in 1986.

Riney went on to establish a series of single-broker, low-overhead offices. By 1990, the firm had 14 locations spread throughout the country. The number quadrupled in the next five years, prompting Inc. magazine to rank it among the nation's 500 fastest-growing companies in 1994 and again in 1995.

INTERNET TRADING BOON FOR MIDWEST-BASED FIRM: 1996–2002

Unwilling to fall behind the curve, Riney led the company into the new Internet medium in 1996, offering online trading to its established customer base. The move invigorated business and propelled trading volume. In September 1999, the 100th office opened, up from 57 in 1995. As the twentieth century wound down, the company on an upward swing, opening 20 branch offices in 1999, a record number for a single year.

A name change in 2000 was indicative of the importance of Internet business. Scottsdale Securities took on the domain name of its web site address, Scottrade. The company ranked as the ninth largest online brokerage in the nation according to the St. Louis Business Journal, with more than 90 percent of its trades made by online customers.

Some of the company's office managers had doubts about the move online, concerned about loss of income or even their jobs. The fears, however, proved unfounded. Riney envisioned a company of 250 local offices by midway through the decade. An internship program was in place to support the planned expansion.

Riney also moved to add new products and services to broaden the revenue stream. Certificates of deposit and wireless trading for handheld devices were among the mix. Keeping the management structure simple, the founder continued to supervise all of the branch offices. More than 65 key employees held shares in the company. All employees were the beneficiaries of a quarterly bonus pool. Riney's management philosophy produced results.

According to American Banker, during the fourth quarter of 2000 the company produced the highest revenue growth among online brokerages. Scottrade climbed 4 percent versus 1.3 percent for CSFB direct and 0.9 percent for Charles Schwab. E*Trade, Ameritrade, and TD Waterhouse reported losses for the quarter. At year-end 2000, Scottrade held $8.52 billion in customer assets.

Perhaps equally significant statistics were gleaned from a Pacific Crest Securities Survey of online brokerage customer service. Scottrade customers reported a near zero wait-time for phone services and an 11-minute response time for e-mails. Customer service reps received above-average grades for product knowledge. All in all, the company was the "hands-down winner," American Banker reported.

Customer satisfaction would take on new significance in the days to come, as an already slowed market took a blow from the September 11, 2001, terrorist attacks and subsequent economic tailspin. Riney told American Banker in early 2001: "The branches are certainly awfully expensive. But as expensive as they are, we believe it is the best way to deliver superior customer service and we will continue to foot the bill." The company had forgone a national call center and kept customer contact on a local level.

During 2001, 21 new offices opened their doors, pushing the total to 147 by year end. The successful online access/local branch office combo received additional recognition. J.D. Power and Associates named Scottrade highest in investor satisfaction among online trading service providers.

Another 24 offices opened in 2002, including the first Manhattan office, bringing the total to 170 by the end of the year. Scottrade, according to Business Week, held 5 percent of the online market. Employees, as well as clients, remained high on Riney's list of concerns. Despite falling sales during 2001 and 2002, the practice of issuing employee bonuses continued.

PUSHING FORWARD: 2003–06

A Chinese trading platform was launched in 2003, to serve the United States, China, Hong Kong, and Taiwan. In August of that year, the millionth customer account was established. In February 2004, the 200th Scottrade branch office opened.

COMPANY PERSPECTIVES

Who We Are—For more than 25 years, Scottrade has been a leader in the stock brokerage industry. A leader in technology, a leader in customer service and a leader in value. Today at Scottrade, investors have the stock trading tools and services they need to take control of their investment needs. Scottrade is proud to provide premium service and deeply discounted commissions to investors of all trading styles and we hope to continue to exceed our customers' expectations by providing the best price, the best service and the best technology.

During 2004, Scottrade readied a new business area: services to independent financial advisers. Competing firms had longstanding adviser service units. Scottrade planned to distinguish itself through pricing, and branch offices would promote trade-handling and record-keeping services.

Like its competitors, Scottrade remained vulnerable to the up and downs of the market, and during the early years of the 21st century many firms merged to stay afloat. Riney reiterated, in an October 2004 Wall Street Journal article, his desire to remain independent, saying the company could continue organic growth without an investment infusion.

Trading activities in 2001 came back to haunt the company in 2005. The National Association of Securities Dealers fined Scottrade $250,000 for improper trading. The St. Louis Post-Dispatch reported in January 2005, the "stock brokerage permitted customers in cash accounts to buy stock without requiring full payment, a violation of Federal Reserve rules." Scottrade responded with systems and office process corrections to eliminate the problem. Financial services companies across the nation were under the microscope, examined for illegal activities with the potential to harm consumers. Scottrade's misstep was largely related to day trading.

On a more positive note, in 2005, the company marked its 25th anniversary as a discount brokerage. As part of the celebration, the company introduced a new flat-rate commission of $7 for all online market and limit orders. In another highlight for the year, Scottrade achieved its sixth consecutive award for investor satisfaction.

The implementation of the $7 trade helped Scottrade capture 11.5 percent of the online trading market, pulling business from Ameritrade, E*Trade Financial, Charles Schwab, and Waterhouse, according to Business Week. Fidelity Investments had market share comparable to Scottrade but nearly ten times the clients.

Ameritrade CEO Joseph Moglia saw the world differently from Riney: he acquired seven firms over a four-year period. He told Business Week: "You can grow without consolidation, but you're not maximizing the potential of the business."

By contrast, Scottrade, 80 percent controlled by Riney and his family, was sheltered from the Wall Street pressure to produce high profit levels. The company produced after-tax margins of more than 15 percent, on $350 million in revenue, versus about 30 percent on $880 million for Ameritrade.

Riney continued to hold true to the low-overhead philosophy gained during his time with Edward D. Jones: branch-office furnishings remained basic, and travel posters from branch cities graced headquarters' walls, Adrienne Carter observed for Business Week. Clients benefited from the savings through inexpensive trades and no inactivity or maintenance fees.

As Schwab and Waterhouse closed branches, Scottrade expanded its office network by 15 to 20 percent per year. Scottrade's 233 offices nationwide earned a second place ranking among branch systems, behind Schwab, according to the Business Week article.

The low-cost philosophy extended into the ad budget. "Mr. Riney has become the firm's public face, starring in its television commercials. It was something he first did 'not because I was a good actor,' but because 'it really was what we could afford.' He has stuck with it because the ads 'seemed to work,'" Gaston F. Ceron wrote for the Wall Street Journal.

Despite Scottrade's success, some industry observers predicted the company's days as an independent company were numbered. All but a few big independents remained available for purchase. During 2005, TD Waterhouse and Ameritrade merged to form TD Ameritrade and E*Trade bought BrownCo and Harrisdirect. Other soothsayers maintained Scottrade's takeover appeal was limited, given suitors in many cases would be buying back customers lost to the lower cost online brokerage.

KEY DATES

1980:: Scottsdale Securities is founded.
1990:: More than a dozen offices are in operation.
1995:: Company enjoys a second consecutive year among Inc. magazine's list of fastest-growing U.S. companies.
1996:: Company begins offering online services to customers.
1999:: Company opens its 100th office.
2000:: Name is changed to Scottrade.
2002:: First Manhattan office is opened.
2003:: A new Chinese trading platform is launched.
2004:: The 200th branch office opens.
2005:: $7.00 flat-rate commission is introduced.
2006:: Company buys naming rights to St. Louis Blues stadium.

In September 2006, Scottrade made an uncharacteristic move, purchasing naming rights to the St. Louis Blues downtown arena. "These naming rights opportunities do not come around often," Riney told the St. Louis Post-Dispatch. "It was kind of now or never. And when I looked at the statistics of the other NHL cities, and how many of our customers were living in and around those metro areas, and how many branch offices there were around the country, I saw it wasn't just a St. Louis opportunity."

The possibility of a marketing collaboration between the team and Scottrade was mentioned but no details were given. Scottrade had a window of opportunity to capitalize on the name change before it became integrated with the stadium's identity. New products and services, banking services among them, were also being considered as part of the rebranding move.

Scottrade expected to be operating more than 300 branches in 2007, up from about 280 in September 2006. Customer accounts had climbed to 1.5 million. Customer assets were $50 million. Average trades per day reached 139,000. The company estimated revenue for 2006 at $750 million, the highest in company history.

Kathleen Peippo