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Four analysts and top management from twelve sector firms examine the brokers & asset managers sector in this special 57-page Brokers & Asset Managers issue from The Wall Street Transcript, available at (212/952-7433) or http://www.twst.com/info/info538.htm

TWST: Mark, how would you compare the performance of the brokers with that of the asset managers over the past year? And if I recall that at last year’s panel, you had quite high hopes for the asset managers.

Mr. Constant: Yes, I have for many years been bullish on the fundamental prospects for the asset management group, and remain so. Joan’s characterization is pretty accurate, but organic growth remains pretty impressive in most cases. Asset managers have held up better than brokers, in large part for those fundamental reasons. Their revenues tend to be more recurring than some of the transactional revenue streams of brokers, and that’s been reflected in their (at least relative) earnings vis-à-vis the brokers, and in their stock performance. Joan’s comments about fixed income are also accurate — and indicative of the fact that fixed income has proven to be the asset class of choice over the course of the last year. However, because I try to be agnostic about whether fixed income or equity is necessarily going to do better on a go-forward basis, I tend to be a little less biased toward any one asset class, in that sense, and really focus on valuations and organic asset growth.

TWST: Mark, what will it take to get a meaningful rebound in M&A?

Mr. Constant: It’s been pretty well identified here. It’s really driven by executive psychology and confidence, with a timing lag. The CEO has to have the confidence to consider a deal before one can be announced, and then, of course, the transaction needs to be completed before you get paid. But I would urge investors to keep in mind that, while these are called investment banks — and we often envision pinstriped bankers basking in the glory of mega-deals — in most cases, M&A generates only 10% or so of revenues. And the related revenue streams, like merger arbitrage trading, aren’t as significant as secondary trading of underwritten offerings, for example. So an M&A rebound would be nice, and I think Joan is exactly right — it’s fourth quarter or first quarter at the earliest before we’ll see big advisory fee income. But you can probably paint brighter pictures than that — perhaps a little sooner — for certain other revenue streams, even if that confidence isn’t necessarily reinstated right away.

TWST: Mark, are there any companies on your coverage list that you’re particularly concerned about that you would suggest that investors stay on the sidelines with, at least over the next six months or so?

Mr. Constant: Here too, I’ll give you the same name I gave you the last two years, Charles Schwab (NYSE:SCH).

TWST: What has happened to Charles Schwab over the past year?

Mr. Constant: Charles Schwab has continued to do a very good job of managing customer perceptions and the value of their retail brand. However, in my opinion, their ability to generate comparable financial results pales by comparison. Whether they like to admit it or not, they are still a long way from transforming the company into a real asset-gathering story. Their earnings have proven to remain highly correlated to transaction volumes and speculative confidence, as commissions and margin interest income have dried up. Going forward, they face an enormous competitive challenge (that even they may still underestimate, in my book) as they attempt to “move up the food chain,” from the high-end of the discounted transaction execution business into the realm of differentiated advice providers. Getting their core customers to step up and pay them for the advice that they’re trying to sell now is another challenge altogether.

This special issue includes:

1) Brokers & Asset Managers - In an in-depth (12,000 words) Analyst Roundtable, Mark Constant, Senior Vice President/Senior Equity Research Analyst at Lehman Brothers, James F. Mitchell, Managing Director, Securities Brokerage & Banking at Putnam Lovell Securities Inc., Lauren A. Smith, Senior Vice President in the Research Department at Keefe, Bruyette & Woods, Inc., Joan Solotar, Managing Director at Credit Suisse First Boston Corporation, examine the outlook for the sector including outlook for IPOs, retail investors and share specific stock recommendations.

2) CEO interviews (average 2,500 words). Top management of twelve sector firms examine the outlook for their firm and the sector.