Well, of course the diode will drop the voltage if there is current
flowing through it. You are right, the voltage drop will be there. However, if the voltage regulator
senses the voltage at the battery
, it will compensate for that voltage drop. Your batteries will receive the correct charge and all will be well. If the voltage regulator senses the voltage at the alternator
, it will not compensate for the voltage drop across the diode and the batteries will be undercharged.
Diode isolators are a valid way of isolating battery
banks. The caveat is of course where the regulator senses the voltage. Some people think that diode isolators are less prone to failure and of course they are less expensive than other types of isolator. I don't see any reason to replace a diode isolator while it is still working.