You have to love this investment manager's take on the recent shutdown of Prudential Financial Inc.'s equity operation, which operated independently from the company's investment banking group.

"If the product was valuable, people would buy it, and it would make a profit," investment manager Chad Brand of Peridot Capital Management said in a recent commentary on SeekingAlpha.com. Brand, who argues that more research departments will be shut down in the future, really cut to the chase in the ongoing debate over how to fund equity research.

First, decimalization killed trading profits for all but the most heavily traded stocks, taking away the incentive of brokerages to cover smaller and less actively traded stocks. Then the Analystgate scandal regarding tainted research during the Internet boom years led major brokerages to settle lawsuits by severing their research and investment banking divisions, making it still harder for research to make money — or at least make easy money.

Lots of people are up in arms about these changes, especially people who have an interest in small-cap or recently IPO'd stocks. As I blogged back in May, a growing number of companies have no analysts covering them at all.

That is indeed a problem when you look at equity research as a tool to help young and little-known companies get more exposure to generate more banking and trading fees. But, if you look at research in terms of its real purpose — that of advising shareholders about the value of a company and offering opinions on everything from earnings to strategic alliances, initial public offerings and M&A activity — you have to ask, "Who wouldn't pay for a good stock tip?"

Brand is really onto something when he observes the real reason no one can make a profit from research may be because it just isn't very valuable. One recent study, he points out, showed that "analyst recommendations not only trailed the returns of the S&P 500 index, but did so with more volatility." —Andrea Orr

See Brand's commentary on SeekingAlpha
See Aug 25, 2003, story on TheDeal.com on the 2003 global settlement
See NewYorkBusiness.com story on Prudential equity group shutdown