JPMorgan Proprietary Funds Torch Investors


JPMorgan financial advisers say that they were encouraged to push the firm’s proprietary products despite the availability of less expensive, better performing alternatives, and that the firm exaggerated the returns of at least one crucial offering (See “Former Brokers Say JPMorgan Favored Selling Banks’ Own Funds Over Others,” by Susanne Craig and Jessica Silver-Greenberg).

JPMorgan, one of the nation’s largest mutual fund managers, reportedly pushed its proprietary products as other parts of the bank were shrinking. JPMorgan was motivated to put its financial interest ahead of its clients (mostly ordinary investors) by the slump after the financial crisis and the firm’s need to make up for lost profits.

The primary benefit to JPMorgan of selling proprietary funds is the fees the firm collects for managing them. The aggressive sales push allowed JPMorgan to gather assets on which to earn fees, despite the industry trend of ordinary investors leaving stock funds in droves, and despite the overall poor performance of its funds. Approximately 42 percent of its funds failed to beat the average performance of funds that make similar investments over the last three years, according to Morningstar.

“I was selling JPMorgan funds that often had weak performance records, and I was doing it for no other reason than to enrich the firm,” Geoffrey Tomes, who left JPMorgan last year and is now an adviser at an independent firm, was quoted as saying, adding: “I couldn’t call myself objective.”

“It said financial adviser on my business card, but that’s not what JPMorgan actually let me be,” Mathew Goldberg, a former JPMorgan broker was quoted as saying, adding: “I had to be a salesman even if what I was selling wasn’t that great.”

Many other firms have discontinued offering their own funds because of the conflicts of interest, according to the article, which names Morgan Stanley and Citigroup as having largely exited the business.

One of JPMorgan’s core products, Chase Strategic Portfolio, contains a mix of both proprietary and non-proprietary mutual funds. JPMorgan receives an annual fee as high as 1.6 percent of the $20 billion of assets in the Chase Strategic Portfolio, compared with 1% typically charged by an independent investment advisor, and also earns a fee on the underlying JPMorgan funds.

Experts are concerned that JPMorgan is recommending proprietary funds for profit reasons rather than client needs. “There is a real concern about conflicts of interest,” Andrew Metrick, a professor at the Yale School of Management, was quoted as saying.

Experts are also concerned that investors are being misled. Marketing materials for the Chase Strategic Portfolio emphasize hypothetical returns when the actual returns are significantly lower.

Advisers are reportedly pressured to recommend the firm’s proprietary products by an “intense sales culture.” The article relates how one branch supervisor sent a congratulatory note with the header “KABOOM” to an adviser who had persuaded a client to put $75,000 into the Chase Strategic Portfolio with the comment: “Nice to know someone is taking advantage of the best selling day of the week!” JPMorgan also circulates a list of top-performing brokers.

“It was all about the money, not the client,” said Warren Rockmacher, a former JPMorgan broker was quoted as saying, adding that if a customer did not invest in the Chase Strategic Portfolio, a manager would ask him why not.

In summary, pushing proprietary products is a way for the firm to make money at the client’s expense. It is incompatible with the image of a “trusted adviser” that firms try to project in their advertising.

Page Perry is an Atlanta-based law firm with over 170 years of collective experience maintaining integrity in the investment markets and protecting investor rights.