Prudential Shuts Down Research Department, And For Good Reason

One of the themes I have written about is the worthlessness of most sell side equity research. Most firms use their research departments to push stocks they have underwritten, and most investors understand that and discount their opinions as a result. Prudential (PRU) didn't believe in that model, and they were right. They decided a while back to put their equity research group out on its own, not joined at the hip with investment banking. I'm sure the thinking was that their research will carry more weight since it is unbiased, and therefore will be a valuable product.

We learned Wednesday that Prudential has shut down its equity research, sales and trading business known as Prudential Equity Group. This move speaks much more loudly than my comments ever could regarding the value (or lack thereof) of analyst research. If the product was valuable, people would buy it and it would make a profit. The fact that sell side research is given away for free to clients should tell you just how valuable it is.

I really do think it is that simple. The last study I read showed that analyst recommendations not only trailed the returns of the S&P 500 index, but did so with more volatility. Hardly a ringing endorsement. Expect other research departments to be shut down now that someone got the ball rolling by being the first.

Disclosure: No position in PRU at the time of writing.

Comments

[Paul Meisel:]

The world has changed.... we used to use analysts not just for recommendations, but for access to data. Now Yahoo Finance and the like give you a lot for free, and your on-line broker gives you some more, and a few hundred dollars in subscriptions will let you be your own analyst.

2007 Jun 12 09:23 AM