New York – After looking for a suitor for its research group for several months, Prudential Financial, Inc. decided to shutter its equity research group. The press release (link below) was issued at 9:05AM this morning.
Prudential produced fundamental research for a list of roughly 400 stocks (though the firm’s research coverage had fallen to about 300 companies recently). At last count, the group had an analytical staff of 28 equity analysts.
Prudential Equity Group’s research performance, as measured by the Investars performance measurement system, was in the lower third of those firms tracked by Investars (year ended March 31, 2007), with the Oil and Gas sector being a bright light, where they were 6th of 27 Alternative research providers. At the most recent reading, the company had a batting average for its BUY ratings of 58%. This is a solid performance and indicates the percentage of BUY ratings which increased in price.
Economics is the key rationale for the decision, as it was for Wells Fargo and others over the past several years. The Prudential Equity Group had been on the block for several months prior to this decision, but had apparently received little interest. The main issue is not the quality of the research product, but the high costs of production, falling commission rates, and the impact that CSAs and CCAs have had on execution revenue in recent years.
Now, with SEC Chairman Cox coming out in direct opposition to soft dollars in his most recent statements, and letters to influential congressman on the Hill, the future economics of the business has taken a severe turn for the worse for traditional brokerage-based equity research.
A copy of the press release can be found on the Prudential web site.