JP Morgan Treated Its Retail Investors as Stuffees, Accused of Lying in Marketing Materials

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It appears that, to the extent Jamie Dimon’s “fortress balance sheet” claims are valid, some of strength results from taking liberties with customers in ways that even other big financial firms shun.

One long standing bad idea on Wall Street has been to have a retail brokerage operation along with in-house mutual funds. The business model always assumes that the retail brokers will happily sell lots of the firm’s funds to their customers. That’s usually a bad assumption. The internal funds seldom perform better than the products sold by other players. And the most successful brokers (the ones who have clients with large portfolios, who typically trade stocks) often are effectively independent businessmen under a big firm umbrella. If they were to leave the firm, they’s take most of their accounts with them. That puts them in a position to ignore firm pressures and bribes to put their client into so-so or bad products. That means it falls to the middling and newbie brokers to take up the slack. And like it or not, there are only two outcomes possible: either the brokers treat their clients to a greater or lesser degree as stuffees, or the funds languish. And since mutual fund profitability is correlated with the size of the fund, the bank has strong incentives to ride the brokers to push their product.

This has been a recognized conflict of interest for decades; I’d hear it come up often on studies back in the stone ages when I was at McKinsey. A story tonight in the New York Times’ Dealbook points out that most banks have finally recognized the folly of their ways. The ones that have in-house brokers have largely exited the in-house mutual funds business….except JP Morgan. According to the Times:

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 and UBS 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 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.

The article details how JP Morgan brokers are pushing clients into stock funds (which have higher fees than bond funds) at a time when investors are generally leery of the product. In general, studies of fund performance find that only funds in the top 10% of performance tend to hold on to outperformance over time; top quarter performers, by contrast, show a lot of rotation. JP Morgan has only a few top funds; for their funds overall, 42% fail to beat the averages for their strategy. This might not be so bad if JP Morgan weren’t pushing its brokers to place investors in internal funds above the alternatives. Some quotes from former brokers:

“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….

“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.”

This isn’t merely the view of some disgruntled brokers. JP Morgan settled an arbitration case for $373 million for giving preferential treatment to its own funds, even though it had a contract to promote the funds of American Century.

On top of that, even if the funds have decent performance before fees, it’s unlikely they will on a net basis. JP Morgan charges an asset management fee of as much as a whopping 1.6% of assets, while freestanding brokers typically levy 1%. It also double dips, charging both the asset management fee and the fee on the underlying funds.

That’s all bad enough, but it still falls in the realm of “caveat emptor,” in that fees are disclosed and anyone who signs up for super-normal charges for an at best ordinary product is asking for underperformance. What is worse is the way JP Morgan plays fast and loose with disclosure:

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….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.

What ballsy double speak! The model performance is not the issue, it’s the use of model returns that by happenstance considerably overstate results.

Now in case you’d like to argue this sort of behavior is an outlier at JP Morgan, consider the experience of a client at the other end of the food chain, Len Blavatnik, one of the 100 wealthiest men in the world (and a one-time client of mine when he was much less rich and had made a rather oddball investment in the US). His industrial empire, Access Industries, had about $1 billion in cash in various pockets that they decided to manage to get a little bit extra return. And mind you, their objectives were modest. They merely intended to beat Treasury bills by a smidge. They set out their investment criteria, which stressed “conservative” and “liquid”. The agreement that they reached with JP Morgan also set maximums as to how much could be invested in various types of assets.

Joe Nocera summarized what happened:

JPMorgan invested part of the $1 billion in triple A tranches of mortgage-backed securities. It also invested some of the money in triple-A tranches of securities backed by home equity loans. Sure enough, beginning in July 2007, those securities began to decline in value. The Access executives began to call the investment manager at JPMorgan, worried about the mounting losses.

“Our research team still is extremely confident that AAA Home Equity asset-backed securities are money good, meaning that over time you will get the entire amount of your principal back,” responded a JPMorgan executive in an e-mail, according to a complaint later filed by Access.

This, of course, is not exactly how things turned out. In April 2008, when Access finally withdrew its money from JPMorgan, the account had lost around $100 million. After trying — and failing — to negotiate a settlement, Mr. Blavatnik sued.

I’ve read the claim and spoke with Blavatnik and his general counsel late last year. They say that what they had gotten so far in discovery, despite considerable foot dragging by JP Morgan (and serious lawyering up, the bank put three big ticket firms on the case) was making them disinclined to accept much less that full compensation for their losses. But they also said that JP Morgan’s strategy was clearly to run out the clock as long as possible and to make the fight expensive for Blavatnik. And remember, he’s not just one of the biggest wealth management clients in the world, he’s also an active buyer and seller of companies. So if someone at this level will be abused by JP Morgan, who is safe? Certainly not you and me.

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  1. readerOfTeaLeaves

    But they also said that JP Morgan’s strategy was clearly to run out the clock as long as possible and to make the fight expensive for Blavatnik.

    So, while JPM is running out the clock, the LIBOR mess is oozing out from under the carpet, and even the Brits are starting up an inquiry into banking. The timing may not be as propitious as they’d hoped.

  2. MyLessThanPrimeBeef


    It’s a scientific fact, I imagine JP Morgan’s lawyer would say, that we all see colors, that is, the world, differently.

    ‘You see lying, and I see no lying,’ he or she might say. ‘It’s a simple matter of which virus you inject into the eyes.’

  3. jake chase

    I offer the following lessons learned from forty years of modestly successful speculation and considerable experience with securities industry con games:

    Anybody going to a bank for financial advice will be churned and burned. The same thing is true for every brokerage firm. Their so called advisors have no idea what they are doing, merely repeat the same nonsense you hear in the television commercials. Stock market diversification is rear view mirror charlatanism. Speculators move the markets and a bunch of sheep play catch up on the basis of earnings reports that are largely fantasy. Small investors cannot win this game and cannot afford to lose. If you must participate in the market buy an index fund when things look particularly grim. If they become grimmer you will still lose, but at least you are behaving prudently, and if the market recovers (as it nearly always does) you will actually make money. Above all, you have to limit losses. The market can stay irrational longer than anyone can remain solvent. There is no such thing as stock market intelligence, or if there is, those who have it are so rich they can’t be bothered giving you or anyone else advice.

  4. Conscience of a Conservative

    The JP Morgan customers got what they deserved.
    First this sort of thing has occurre for decades, second the financial advisor is a salesman and not an investment advisor and not a fiduciary. Brokers are held to a suitability standard. The standard is only that the investment is “appropriate” for the risk and objectives. Third warning signs should go off when the best investment a JP Morgan advisor can find is one…**offered by his own firm** Lastly why is anyone taking investment advice from someone whose sole credentials are watching CNBC and having passed a series 7. There’s a great deal more to investing.

    1. Gentlemutt

      Ignorant people get what they deserve, eh? That is not conservatism. That is darwinism with a small ‘d’.

      There is a great deal more to living a good life in a decent society than institutionalized parasitism in the service of managerial kleptocracy.

      1. skippy

        Spencer Hubert an editor of the *Economist* coined the phrase “Social Darwinism”, Go fkin figure…eh.

    2. damian

      “The JP Morgan customers got what they deserved”

      when fraud is the only tool in the bag and no matter what the product or trade then the word ” deserve” actually means – participate – at any point in the value chain – end to end – the banks will- lie cheat and steal – and you lose!

      the only solution is not to participate – this isnt about experience or education or sophistication – what this Blavatnick case shows and my own experience is that it doesnt matter whether you have billions or not – all parties are considered victims

      Morgan Stanley withphony AAA ratings and strong arm the rating agency
      Chase on phony mutual fund disclosures and much more
      Goldman Sachs on stuffed – one shitty deal – CDO’s
      Barclays on rigged libor rates
      BoA on fraudulent foreclosures
      Citi on fraudulent investor CDO disclosures
      MF Global on stealing cash from private accounts
      frontrunning everywhere!!!!!

      what “part” of the financial markets do you need to participate in – even if you have full expert knowledge – that you will not get near any FRAUD?

    3. Bam_Man

      Yes, exactly. When dealing in a den of thieves, don’t act surprised when you get robbed.

  5. ltr

    Typically shameful business ethics fostered by JPMorgan executives. Never ever trust a JPMorgan executive.

  6. Bam_Man

    A muppet is a muppet is a muppet.
    Let me be clear here. I have worked at these places in positions of “responsibility” managing billions dollars in customer funds. And I can tell you unequivocally that the attitude at this point in time is “If these people are stupid enough to continue doing business with us, then they ‘have it coming'”. Nowadays, that is THE NUSINESS MODEL. The traditional banking business model is dead and buried. Rampant credit defaults, zero interest rates and a yield curve that is flat-as-a-pancake have these guys backed into a corner like a bunch of trapped rats. And that is how they behave now. Get used to it.

  7. Ishmael

    So let me tell you about JP Morgan. My mother was had cancer surgery and she was appoximately 80 at the time. She had over $200,000 in one account so I moved some of her money to Banc One and set up a CD. When JP Morgan bought out JP Morgan they called her down there and my mother who was like 82 at that time and had some speech impediment due to a mild stroke took my sister with her who knows nothing about finances and thinks she knows everything. Anyway, they talked her into moving her money out of the CD I set up and into a 10 year insurance contract with guess who AIG (OK it matures when she was 92 get that). I was on a rare vacation when talking with my Dad, he said he was worried about the insurance contract my mother invested in until he heard I had put her money into it. I am kind of like what! Well after we talk it over, he goes down and takes his money out of the contract and closes the relationship totally and moves the money to another bank.

    Such a fine institution. Now my mother had a brother at Pearl Harbor when it was bombed, a brother in the marines at Iwo Jima and my father jumped with the airborne the night before D Day. This is how this criminal organization treats real Americans. The crimanality starts at the top and goes all the way down to the lowest person in the organization. True of most banks.

    The worse part of the whole thing, was my sister (a federal govt employee) was going around with my mom and changing the beneficiary off of all the accounts I set up from my father to her. Wonderful!

  8. Fraud Guy- Also

    I wish I could offer the details, but for reasons of protecting my identity, I can’t.

    A close friend of mine is CIO at one of the largest foundations in the U.S. When he started the job, he discovered that the foundation’s board had effectively turned the management of the foundation’s assets over to JPM Private Bank a number of years previously. What had JPM invested in? A whole bunch of crummy JPM house products. This is a multi-billion dollar client, and JPM couldn’t restrain its greed to at least put on a show of looking like it was acting like a fiduciary. You’d think long-term self-interest would lead the bank to chisel quietly, around the edges, instead of brazenly. But that’s the reality of the business.

    1. Ms G

      This “business model” is widespread (like a metastatic stage 4 cancer) across every single bank with a “wealth management” department. The victims include very large to very small foundations, and also billions of dollars worth of private trusts (including the “small potato” ones). These types of accounts (foundations/trusts) were aggressively sought by retail banks when they went on a buying binge of small trust banks across the country in the late 1980s, early 1990s. One direct driver of this “strategy” was to grab Seed Money for the proprietary in-house junk products (mostly high fee, lousy performance mutual funds and insurance products) of those same retail banks. JPM, BoFA, Citi, PNC, and probably a few others thus systematically looted cash to load into their junk-product fee extraction machines. Ever hear a word about this from the SEC, OOC, Fed Reserve, etc? Nope.

    2. damian

      Morgan Stanley successfully pressured Standard & Poor’s and Moody’s Investors Service Inc. to give erroneous investment-grade ratings in 2006 to $23 billion worth of notes backed by subprime mortgages, investors claimed in a lawsuit, citing documents unsealed in federal court….

      The unsealing of the internal documents from Moody’s and Standard & Poor’s came in one of the largest ratings lawsuits to emerge from the 2008 financial crisis. The lawsuit was filed in 2008 by Abu Dhabi Commercial Bank, based in the United Arab Emirates,

      Obviously Abu Dhabi Commercial Bank can go the distance in a damage suit against MS -$23 Billion judgment wipes out MS when it comes – so they dont care about the risk to the bank – there is no safety in size, strength, long standing relationships, political connections- zero!


      there is no solution – except dont play in the sandbox – you are dead based upon your belief system – that you are smarter or have more resources – these people will do anything and as Corzine proved even the cash in an account they will steal- dont play!

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