By Brian Dumaine; Charles Schwab

(FORTUNE Small Business) – On this summer morning, in his aerie overlooking San Francisco Bay, Charles Schwab reveals in a rare moment of emotional candor what drove him to build one of Wall Street's most successful companies. "I have this deep passion for entrepreneurs and what they do and what they add to society. Yes, we're rewarded for the high risks we take, but entrepreneurs have also created most of the new jobs in America. They are the backbone of the great economy we have." Schwab, the quiet, thoughtful founder and chairman of Charles Schwab, the nation's fourth-largest brokerage firm, has done his share of creating jobs. With 2002 sales of $4.1 billion, the company now employs 16,000. Getting there wasn't easy. Growing up in a family of modest means in a small town outside Sacramento, Schwab had to overcome dyslexia, struggling his way through Stanford, before landing a job in a small brokerage house.

His big break came in 1975 when the SEC deregulated brokerage commissions and the young Schwab saw an opportunity to undercut the big boys on Wall Street by as much as 75%. With $100,000 borrowed from a rich uncle, he started a business that allowed individual investors--not Wall Street bigwigs--to decide on their own which stocks they wanted to buy and sell. Despite attempts by the Wall Street establishment to put the maverick out of business, Schwab thrived, thanks to his early and shrewd use of technology, savvy marketing--he was one of the first celebrity CEOs on TV--and a strategy of charging his customers only for the services they used. Today Schwab's company has diversified into mortgages and financial planning. Here's his story.--BRIAN DUMAINE

"When I started out, I didn't really have any entrepreneurial DNA in my blood. My father was a district attorney. He worked in a small farming community near Sacramento where they had only one DA, and he was the guy. Through World War II and the years after that, I was brought up in a family with a Depression mentality. Times were tough, and I was well immersed in how things were so limited. As a boy I thought, Well, I would like to make a difference in my life and maybe see if I can create some wealth, create financial returns that might help myself or my family.

I didn't really have any heroes back then. At 10 years of age, you're not thinking about the rest of the world; you're thinking about yourself. I did a lot of jobs throughout my school years, bagging walnuts, caddying, tractor driving, and so forth. When I was about 12 years old, I started raising chickens. I like to joke that the chicken business was my first fully integrated venture. Obviously, selling the eggs was very important. I also realized that a lot of women back then--this was 1949, 1950--needed fertilizer for their gardens. The chicken droppings were very well received for that, and of course at the end of the poor chicken's life cycle, you could sell it as a nice fryer. So I just put it all together, selling everything except the feathers.

I used the money I earned to help my family make ends meet. I didn't really have a chance to save and invest my money back then. After all, you have to save the money before you have it to invest. I learned the first part of economic principles: Saving has to come before investing.

Although I didn't know it at the time, I was dyslexic. It seemed as though I always had to work harder than the other kids, and there were some huge disappointments. I was very good in math and science but weak when it came to reading and writing. I eventually overcame my dyslexia because I was a reasonably competent kid and had a reasonably outgoing personality. I could communicate well with my teachers and had no problem asking them lots of questions in class. I think that's why I became favored among teachers. They'd say, "Gee, Chuck really works hard at it. We gotta give him the B instead of the C--."

You could say that trying to overcome these obstacles helped shape me as an entrepreneur because it taught me humility. I'm a big believer in humility. I think out of it comes that sense about trying to do better or work harder because you never quite feel you're really there, you're never quite certain you've accomplished in the eyes of other people what you wanted to do. I still feel that way today, and it's wonderful fuel for motivation. It's helped me accomplish some things that I wouldn't have believed possible for me to do.

For example, I was lucky enough to go to Stanford and study economics. But because of my dyslexia and a heavy reading schedule of English lit and Western civilization, I almost flunked out the first year. I hung on by my fingernails and made it through--and then got my grounding when I was able to start concentrating on business and economics, which I was pretty good at because I'm more a financial guy than a literature guy. And I went on to get my MBA from Stanford in 1961. I knew by that time what I wanted to do: I wanted to be a securities analyst.

My first interest in stocks had come about when I was 13 or 14. I began thinking about stocks and reading things like the Wall Street Journal.

It all goes back to this money thing, worrying about not having enough. My dad was interested in stocks and even owned a few. And he began to explain to me the stock tables. I started following them more and more closely. I'd say, "These are the stocks I'd like to buy," and we would look at them. I'd see how you could make money in the market. So anyway, from that point forward through high school and then through college, I began to read the stock tables more. It crystallized my interest in economics, the stock market, how to make money, and how money is made there. Then, when I got into business school, I majored in finance.

While I was going to business school, I worked as a part-time securities analyst for a little firm in Menlo Park, and I got a full-time job there after I got out in '61. So I learned a lot about companies. I learned about small companies. I learned how to analyze them, about the engineering of companies, about their financial underpinnings.

Yet I didn't think about starting my own business until a couple of years later. In 1963, I left the financial firm and set up an investment advisory company with two other guys. It was called Mitchell Morse & Schwab. My two partners had put in most of the seed money, but I negotiated a 20% ownership stake plus a salary.

In March 1963 we launched our first publication, called Investment Indicators, which sold for $60 a year. It was full of advice about which companies to buy, which to sell.

Eventually we added a mutual fund, some hedge funds, and a brokerage business. Then things got so ugly in the 1972-74 downmarket that we finally had to split up the company. I bought the distressed shares from my partners with $100,000 I had borrowed from my Uncle Bill and changed the name to the Charles Schwab Co. Later I helped my Uncle Bill sell his manufacturing company, and in exchange for my banking services, he erased that debt. He later invested in my company, and I made him a very rich man.

Around the same time, I started putting money into a lot of crazy and ultimately unsuccessful ventures like Congoland USA, a drive-through zoo, and the Music Expo of '72, a concert featuring Chuck Berry. I have a deep passion for entrepreneurs and what they do and what they add to society, and I guess that being one of them, I'm probably as big a sucker--it's probably the wrong word to use--I can fall in love with a concept as fast as anybody can. What I learned from them is that no matter how good the idea, if you don't have the ability to execute, if you don't have the proper management, the business is just another trip to the cemetery.

Then my big break came. By law the securities industry had been charging fixed brokerage fees--it had been that way for around 200 years. Then, in 1975, the SEC changed the laws, allowing firms for the first time to offer discount brokerage fees. And so I set out to reshape this whole industry. Fundamentally, at that time most people thought that individual investors were sold stocks; they didn't buy them. So the whole brokerage industry was based on that particular notion. And I thought there had to be a group of people--I didn't know how big--who actually bought stocks on their own. They didn't need to be sold stocks by some commission-based broker who was selling a story to somebody. But there were actually people who read Value Line or did their own research and then made a decision without having some broker with a story and all this stuff try to foist something on them.

And that was the original notion for my new business. I built a company that was for independent investors who could do their own work without traditional brokers--and who could buy and sell stocks at a much lower rate. The big brokerage houses bundled a lot of costs into their commissions. So when you bought a stock from them, you paid for research, you paid for the transaction, you paid for the broker's advice--all that stuff. We unbundled it all, gave people a choice--that was the heart of my new firm.

Charles Schwab took off from the very beginning because we provided a lot of value. Investors were paying huge commissions, more than they should have paid. The average commission a traditional firm would charge back then was $200 or $225 per transaction. We were charging $70. And the brokers who were charging those heavy commissions were really just selling stories. And many of those stories involved a conflict of interest, similar to what's been coming out of today's Wall Street scandals. The brokers back then might have just been trying to unload stocks that had piled up in their inventory or maybe to grease investment-banking relationships. All that stuff was there--it was pretty heavy. Most brokers always kept a holier-than-thou appearance. But underneath, in the bowels of the big brokerage companies, there were all these conflicts of interest going on. Schwab's value proposition was that we were a safe place to do your business without the intimidation or the sales pressure of a traditional brokerage relationship.

And so all these independent investors started coming out of the woodwork. And they loved what we did. Our mantra was always about being totally empathetic toward the clients--the customers--and their needs. We added more capabilities, like no-fee mutual funds, web trading, and financial planning, as we went along. We grew and grew and grew.

Since we didn't have a sales force--we depended on word of mouth--advertising was key. In fact, we were one of the first firms to use the CEO as the pitchman on television. In the late 1970s we had very inanimate, unemotional ads that said, "Save 50% to 75% on your commissions." My advertising director said, "Chuck, you just had a wonderful article written about you in the San Francisco Chronicle, and it had a nice picture of you. Why don't we use that picture in an ad? We'll say, 'This is what we do, and here are the people who work here.'"

And I said, "I'm not sure that I want to do that. What are my friends going to think--what kind of egomaniac are you? What are my kids going to say about this?" I finally said, "Okay, we'll do one." And that's it. The response was three, four, five times more than the other ones had. And so the ad director convinced me: He said, "Chuck, you have become the personality of the company. People trust you more than just some words in an ad."

Around the same time I made a huge bet-the-company move that almost killed us. It became obvious to me that the business itself was so paper-intensive, so transaction-intensive, that to ever get scale, to ever become more than a small business, we had to adopt technology in a big way to handle brokerage transactions. We spent $500,000, the entire net worth of the company, on some used IBM 360s left over from CBS's 1976 election coverage. It was scary because the implementation of the software was pretty rough. We had stops and starts. This computer we had was not reliable. I think that's why CBS sold it to us.

Fortunately, IBM came to our help. It leased us a brand-new computer. A few months later we took the 360s out. And that saved our bacon.

As we kept growing we were being perceived more and more as a big threat to Wall Street. We'd go for financing to some venture capital guys who were basically backed by Wall Street-type firms. And they would give us the thumbs down because we were scaring them, I guess for good reason. But we had real difficulties raising any meaningful capital.

And so that is one of the reasons why in 1983 I sold my company to Bank of America. We were growing so fast, I needed the capital to keep going, and I had been turned down by Wall Street--it didn't want to finance a competitor who threatened its core business. But the deal turned out to be a bad move. Bank of America, of which I was then the largest shareholder, fell on some tough times. It had made some bad loans and so forth. Fast-forward to '85, '86: I was getting very unhappy with the situation. There was so much bureaucracy, I couldn't innovate the way I wanted to; so when the bank started selling off a bunch of subsidiaries, I started asking management, "Why don't you sell my company back, and I will pay you a fair price?"

So in March 1987 it agreed to sell Schwab back to me and my management team in a leveraged buyout. We paid Bank of America $300 million for the company, about five or six times what it had paid us. So it had done pretty well in four years of ownership. Wanting to deleverage as fast as possible, I took Schwab public in September 1987, right before the stock market crash.

All hell broke loose. Customers called us to sell their stocks and couldn't get through. In the wake of the crash we did a survey and found that our customers saw us as less friendly than we had thought--more of a cold transaction kind of company.

We've tried to change all that. Today every time someone does trades with us, we survey him to see how well we did and how well our broker served him. We use that to decide which employees need remedial training. Also, the ones with the best marks get larger bonuses than people who are at the lower end.

One of the things that has kept this place together over the years is simply that it's a great place to work. It goes back to my early days as an entrepreneur, when I learned to treat people well. And I'm particularly proud of the fact that back in the early days when Wall Street was not a friendly place for women, we were. A big part of our ability to execute on customer service was hiring women. Many have been very successful, not only as regular employees and brokers but also as executives. I've found that women are more empathetic toward customers than the typical commission-driven male broker.

Also, I think people like to work here because we listen to them. What I do know is that I'm an idea guy--I'm pushing new concepts through all the time. Yet I also know my limitations. I try to surround myself with really smart people. And if my idea is bad, they're encouraged to say, "This is a bad idea, Chuck. This isn't going to work, Chuck, and here's why."

Perhaps most important, we think it's crucial to treat our employees just the way we treat our customers. We've created an environment at Schwab that is friendly, safe, ethical. People love working because when they go home at night, they can feel good about themselves. They know they've treated the customer well, and that's what we're about."