Facing a slump after the financial crisis, JPMorgan Chase turned to ordinary investors to make up for the lost profit.
But as the bank became one of the nation’s largest mutual fund 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 fundsthat 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, 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 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.
“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, 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.
What Investors Really Bought
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.”