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Tuesday, July 3, 2012

JP Morgan: Conflict of Interest in Mutual Funds


As JPMorgan Chase was increasingly getting into the managing function of mutual funds, the bank also created and sold its own funds. I submit that these two tasks being done by the same firm constitutes a structural conflict of interest, regardless of any purported “Chinese wall.” In other words, a certain tension exists when the two functions are performed by the same business entity because the incentives in one of the two tasks (i.e., selling one’s own funds) inherently shirk the viability of the other task (i.e., being a financial advisor). In particular, the objectivity implied and even advertised in the latter is apt to be relegated as the sales function kicks in. The “answer” to this ethical problem is that a given bank should do one or the other, but not both tasks. Put another way, only a fool tries to do everything—only a greedy fool.

Given the susceptibility of the objectivity of acting in a customer’s best interest to the financial allure of selling the bank’s own products, the “financial adviser” position at JP Morgan Chase is at best a pretentious lie. “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.” As though an alcoholic in perpetual denial, a bank spokesperson affirmed regardless, “We always place our clients first in every decision.” The word always itself belies the truthfulness of the declaration. Such words are regularly included in certain items in human resource tests in order to assess the validity or veracity of a subject’s responses.

Disabusing us of the always  and every in the bank’s official pronouncement, the “financial advisers” at JPMorgan “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 bank’s spokesperson would doubtless also insist that the financial advisors are indeed advisors. The facts on the ground could be completely opposite, and the misleading, self-serving statements would continue unabated. “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.” Hence, the bank's presumptuous use of the term, "financial advisor," can be reckoned as a lie of false entitlement.

Geoffrey Tomes admits to having favored the bank's own funds in "advising" clients

As an aside, the use of “guest” for customer at Target evinces a linguistic error that managers regularly ignore as they presume their company cannot be wrong. I don’t think I would be able to contain my laughter were I to hear “financial advisor” and “guest” in the same sentence by a primp (or pimped) banker at JPMorgan.

At the bottom of the conflict of interest at the bank is the financial benefit to the firm in pushing its own funds under the subterfuge of "advising" customers. The bank made this expression into an oxymoron by making money the overriding goal. “The more money investors plow into the bank’s funds, the more fees it collects for managing them. . . . 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.” In other words, the incentives in the sales function are such that an “advisor” aspect in any other position at the bank is susceptible to the gravity. Lest any paper or Chinese walls be presumed to protect the “advisors,” the business entity itself transcends such “safeguards.”

In a structural or institutional conflict of interest, two tasks are being done when one of the two should be done. The refusal, even if tacit, to apply the self-discipline that is necessary to give up one of the two functions is itself a vice (that of having it both ways) in terms of virtue or character ethics. Continuing to do both tasks, as if “We always place our clients first in every decision,” is inherently unethical because of how the two tasks interact (the incentives of one task undercutting the viability itself of the other task). As simple as this is, structural conflicts of interest are strangely tolerated (or even ignored) by modern society, as though by an alcoholic culture in collective denial.

Source:

Susanne Craig and Jessica Greenberg, “Former Brokers Say JPMorgan Favored Selling Bank’s Own Funds Over Others,” New York Times, July 2, 2012. http://dealbook.nytimes.com/2012/07/02/ex-brokers-say-jpmorgan-favored-selling-banks-own-funds-over-others/?hp