Prudential Exits Research: A Boost for Independents?

Prudential's (PRU) decision to exit the research business shows just how hard it is to make money in research without the underpinnings of investment banking. Prudential's strength was that it had no investment banking conflicts.

But conflict concerns notwithstanding, banking pays the bills. (I actually think that one of the dirty little secrets that nobody talks about is that at some regional firms -- and even a few larger ones -- there's still a tie-in and conflicts between banking and research. But good luck trying to prove it.)

And while Prudential's formal comment is that the business couldn't "scale," the more likely reason is that it could provide research to its own clients from other sources at a much lower cost.

Furthermore, the likes of Charles Schwab (SCHW) and TD Ameritrade Holding (AMTD) appear to be doing fine without in-house research.

Speaking of which, and for what it's worth: Gradient Analytics, an independent research firm that has been under fire from companies that don't like critical commentary, issued a release today that shows its companies that have been the focus of its negative research underperformed peers by 5.3% and 9.2%, respectively, in the ensuing six and 12-month periods over the full history of coverage. In 2006, companies receiving Gradient's lowest grades underperformed their peers by 3.1% and 10.2% six and 12 months later, respectively.

Comments

[the_Bird]

Don't forget the greater scrutiny soft dollar payments receive these days as another factor. Pretty sure Fido, as one major example, is now paying for research with hard dollars - and paying much lower basic commission rates. Harder to bury research "profits" in commissions these days.

[Ralph F]

Isn't this more due to relentless downward presssure on trading commissions than Pru's lack of investment banking?