Brokers and financial advisors of JP Morgan Chase have said they were encouraged by the investment bank to favor JP Morgan's own products even when the product of competitors were less expensive or better-performing, according to a report in the New York Times.
|A report says JP Morgan Chase pushed brokers to sell proprietary funds.
Some advisers told the newspaper they felt pressured to recommend proprietary products as part of an intense sales culture.
JP Morgan decided to grow its retail investment business to make up for lost profits after the financial crisis of 2008, the report said. The unit employs about 3,100 brokers throughout its branches, as well as a large number of financial advisers.
The bank manages nearly $160 billion in fund assets, and some current and former employees told the New York Times that clients’ needs can be overshadowed by the desire to generate management fees. Brokers and financial advisors formerly with JP Morgan told The New York Times that they sold products with weak performance records to benefit the bank.
The report also said that documents reviewed by the newspaper revealed that the bank exaggerated returns in the marketing materials of the Chase Strategic Portfolio, a key product.
Zealous marketing could be one reason JP Morgan’s stock funds have grown as other funds have watched ordinary investors pull out in large numbers. Mutual funds have been a growth area for the bank despite a lack of top-performers. According to Morningstar, a fund researcher, about 42 percent of JP Morgan’s funds failed to beat the average performance of funds making similar investments.
While other investment banks – for example, Morgan Stanley and UBS – have ramped up their retail investor efforts, drawn by returns steadier than those of trading desks, JP Morgan is alone in its focus on selling its own funds, the report said. Many companies have backed away from the practice and it remains controversial.
JP Morgan has had to deal with the consequences. In 2011, arbitration resulted in an order for the bank to pay $373 million for favoring its own products despite an agreement to sell American Century alternatives, the report said.
Melissa Shuffield, a spokeswoman for JP Morgan, told the New York Times that the strategy was sound because the bank possessed in-house expertise, and because customers wanted access to the proprietary funds. She also said other companies accounted for a high percentage of JP Morgan fund sales.
While other parts of the bank are getting smaller, JP Morgan has added hundreds of brokers over the past few years to its retail investment business. At the core of this expansion are products like the Chase Strategic Portfolio, the report said. The Portfolio is collection of about 15 mutual funds, some developed by JP Morgan and some not. It mainly offers six models of varying risk for ordinary investors who want holdings in stocks and bonds.
Begun four year ago, the Portfolio has been a success for JP Morgan, and now represents about $20 billion in assets, according to documents reviewed by The New York Times. Top advisors with JP Morgan itself have nearly $200 million’s worth of assets in the program.
The annual management fee for the Portfolio can reach as high as 1.6 percent of assets. To compare, the report said an independent financial planner catering to ordinary investors usually charges about 1 percent. JP Morgan also earns a fee on the underlying proprietary funds collected in the Portfolio, while some other money managers typically waive expenses on their own funds.
The reality of these fees has some worried that JP Morgan might recommend proprietary funds to client for whom they unsuitable in the interest of profit, the report said.
In addition, ordinary investors might not have a sufficient understanding of what they are buying. Unlike traditional mutual funds, the Portfolio’s marketing documents feature theoretical returns. The actual performance has been weaker, the report said.
The Portfolio’s marketing materials tout a hypothetical annual return of 15.39 percent after fees over a three-year period, but the actual return was 13.87 percent a year, below the hypothetical performance as well as a standard the benchmark the bank created as a point of comparison, the report said.
Shuffield, the spokeswoman, told the New York Times that all the Portfolio’s models have gained 11 percent to 19 percent per year on average since 2009. She called these returns objectively competitive. She added that it was standard practice in the industry to wait until all models in a portfolio have three years of returns before including the actual results in the marketing materials. Regulators tend to dismiss hypothetical returns as overly sunny, the report said.
The bank is now preparing materials that feature the actual returns, Shuffield said.
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