[Vision2020] Whores At Work

[Art Deco]

 [image: DealBook - A Financial News Service of The New York
Times]<http://dealbook.nytimes.com/>
  July 2, 2012, 9:06 pm Former Brokers Say JPMorgan Favored Selling Bank’s
Own Funds Over Others By SUSANNE
CRAIG<http://dealbook.nytimes.com/author/susanne-craig/>
and JESSICA SILVER-GREENBERG<http://dealbook.nytimes.com/author/jessica-silver-greenberg/>

Facing a slump after the financial crisis, JPMorgan
Chase<http://dealbook.on.nytimes.com/public/overview?symbol=JPM&inline=nyt-org>turned
to ordinary investors to make up for the lost profit.

But as the bank became one of the nation's largest mutual
fund<http://topics.nytimes.com/your-money/investments/mutual-funds-and-etfs/index.html?inline=nyt-classifier>managers,
some current and former brokers say it emphasized its sales over
clients' needs.

These financial advisers say they were encouraged, at times, to favor
JPMorgan's own products even when competitors had better-performing or
cheaper options. With one crucial offering, the bank exaggerated the
returns of what it was selling in marketing materials, according to
JPMorgan documents reviewed by The New York Times.

The benefit to JPMorgan is clear. The more money investors plow into the
bank's funds, the more fees it collects for managing them. The aggressive
sales push has allowed JPMorgan to buck an industry trend. Amid the market
volatility, ordinary investors are leaving stock funds in droves.

In contrast, JPMorgan is gathering assets in its stock funds at a rapid
rate, despite having only a small group of top-performing mutual funds that
are run by portfolio managers. Over the last three years, roughly 42
percent of its funds failed to beat the average performance of funds that
make similar investments, according to
Morningstar<http://dealbook.on.nytimes.com/public/overview?symbol=MORN&inline=nyt-org>,
a fund researcher.

"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," said Geoffrey
Tomes, who left JPMorgan last year and is now an adviser at Urso Investment
Management. "I couldn't call myself objective."

JPMorgan, with its army of financial advisers and nearly $160 billion in
fund assets, is not the only bank to build an advisory business that caters
to mom and pop investors. Morgan
Stanley<http://dealbook.on.nytimes.com/public/overview?symbol=MS&inline=nyt-org>and
UBS<http://dealbook.on.nytimes.com/public/overview?symbol=UBS&inline=nyt-org>have
redoubled their efforts, drawn by steadier returns than those on
trading desks.

But JPMorgan has taken a different tack by focusing on selling funds that
it creates. It is a controversial practice, and many companies have backed
away from offering their own funds because of the perceived conflicts.

Morgan Stanley and
Citigroup<http://dealbook.on.nytimes.com/public/overview?symbol=C&inline=nyt-org>have
largely exited the business. Last year, JPMorgan was the only bank
among the 10 largest fund companies, according to the research firm
Strategic Insights.

"It said financial adviser on my business card, but that's not what
JPMorgan actually let me be," said Mathew Goldberg, a former broker who now
works at the Manhattan Wealth Management Group. "I had to be a salesman
even if what I was selling wasn't that great."

JPMorgan has previously run into trouble for pushing its own funds. In a
2011 arbitration case, it was ordered to pay $373 million for favoring its
products, despite an agreement to sell alternatives from American Century.

JPMorgan defends its strategy, saying it has "in-house expertise," and
customers want access to proprietary funds. "We always place our clients
first in every decision," said Melissa Shuffield, a bank spokeswoman. She
said advisers from other companies accounted for a large percentage of the
sales of JPMorgan funds.

At first, JPMorgan's chief, Jamie
Dimon<http://topics.nytimes.com/top/reference/timestopics/people/d/james_dimon/index.html?inline=nyt-per>,
balked at the idea of pushing the bank's investments, according to two
company executives who spoke on the condition of anonymity because the
discussions were not public. Several years ago, Mr. Dimon wanted to allow
brokers to sell a range of products and move away from its own funds. Jes
Staley, then the head of asset management, argued that the company should
emphasize proprietary funds. They compromised, building out the fund group
while allowing brokers to sell outside products.

Now, JPMorgan is devoting more resources to the business, even as other
parts of the bank are shrinking. Since 2008, JPMorgan has added hundreds of
brokers in its branches, bringing its total to roughly 3,100. At the core
of JPMorgan's push are products like the Chase Strategic Portfolio. The
investment combines roughly 15 mutual funds, some developed by JPMorgan and
some not. It is intended to offer ordinary investors holdings in stocks and
bonds, with six main models that vary the level of risk.

The product has been a boon for JPMorgan. Begun four years ago, the Chase
Strategic Portfolio has roughly $20 billion in assets, according to
internal documents reviewed by The Times.

Off the top, the bank levies an annual fee as high as 1.6 percent of assets
in the Chase Strategic Portfolio. An independent financial planner who
caters to ordinary investors generally charges 1 percent to manage assets.

The bank also earns a fee on the underlying JPMorgan funds. When Neuberger
Berman bundles funds, it typically waives expenses on its own funds.

Given the level of fees, one worry is that JPMorgan may recommend internal
funds for profit reasons rather than client needs. "There is a real concern
about conflicts of interest," said Andrew Metrick, a professor at the Yale
School of Management.

There is also concern that investors may not have a clear sense of what
they are buying. While traditional mutual funds update their returns daily,
marketing documents for the Chase Strategic Portfolio highlight theoretical
returns. The real performance, provided to The Times by JPMorgan, is much
weaker.

Marketing materials for the balanced portfolio show a hypothetical annual
return of 15.39 percent after fees for three years through March 31. Those
returns beat a JPMorgan-created benchmark, or standard of comparison, by
0.73 percentage point a year.

The actual return was 13.87 percent a year, trailing the hypothetical
performance and the benchmark. All four models with three-year records were
lower than the hypothetical performance and the benchmarks.

JPMorgan says the models in the Chase Strategic Portfolio, after fees,
gained 11 to 19 percent a year on average since 2009. "Objectively this is
a competitive return," said Ms. Shuffield.

The bank said it did not provide actual results for the investment models
in the Chase Strategic Portfolio because it was standard practice in the
industry to wait until all the parts of the portfolio had a three-year
return before citing performance in marketing materials. She said the bank
was preparing to put actual returns in the materials.

Regulators tend to discourage the use of hypothetical returns. "Regulators
frown on using hypothetical returns because they are typically very sunny,"
said Michael S. Caccese, a lawyer for K&L Gates.

While brokers do not receive extra bonuses or commissions on the Chase
Strategic Portfolio, some advisers said they had felt pressure to recommend
such internal products as part of the intense sales culture. A supervisor
in a New Jersey branch recently 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. "Nice to know someone is taking advantage of the
best selling day of the week!" he wrote.

JPMorgan also circulates a list of brokers whose clients collectively have
with the largest amounts in the Chase Strategic Portfolio. Top advisers
have nearly $200 million of assets in the program.

"It was all about the money, not the client," said Warren Rockmacher, a
broker who recently left the company. He said that if he did not persuade a
customer to invest in the Chase Strategic Portfolio, a manager would ask
him why he had selected something else.

Cheryl Gold said she got the hard sell when she stopped by her local Chase
branch in New York last year and an adviser approached her about the Chase
Strategic Portfolio.

"They pitched this product to me, and I just laughed," said Ms. Gold. "I
saw it as a way for them to make money at my expense."

-- 
Art Deco (Wayne A. Fox)
art.deco.studios at gmail.com
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