The following story appeared in the New York Times on July 11, 2012:
Regulators are examining JPMorgan Chase’s sales tactics, after claims that the nation’s largest bank pushed its own mutual funds over competitors’ investments.
Authorities are responding to current and former JPMorgan financial advisers who said they had felt pressure to sell the bank’s products even when cheaper or better performing options were available.
Several brokers told The New York Times that they had been encouraged to favor JPMorgan funds, and they described a broader culture that emphasized sales over client needs. Also, in the marketing materials of one major offering, JPMorgan published hypothetical performance results, even though actual returns existed, according to internal bank documents reviewed by The Times. In each case, the actual gains were lower than the theoretical results.
Now, regulators, including the Securities and Exchange Commission, the Financial Industry Regulatory Authority, the Manhattan district attorney and officials in New Jersey and Delaware, have opened inquiries into JPMorgan’s sales practices, according to several people briefed on the activities but not authorized to speak on the record. The S.E.C. and New Jersey’s Office of the Attorney General have scheduled several interviews related to the case, these people said.
The people cautioned that these inquiries, directed at the bank’s Chase Wealth Management division, are at an early stage. No one at JPMorgan has been accused of any wrongdoing.
While the bank declined to comment on regulatory matters, a spokeswoman, Melissa Shuffield, said that JPMorgan “doesn’t pressure brokers to sell its funds over any other product.”
“We stand behind the integrity of our investment process and fund selection and always place our clients’ interests first in every decision,” Ms. Shuffield said.
In the wake of the financial crisis, JPMorgan made an aggressive effort in this area, building up its mutual fund offerings and expanding its brokerage sales force. The strategy, which runs counter to the approach favored by much of the industry, proved successful. Even as small investors left the stock market in droves, JPMorgan collected billions of dollars, becoming one of the largest mutual fund managers in the country.
JPMorgan managed to attract assets, even though the performance of its funds has been just above average. Fifty-nine percent of its funds beat their peer group average for the three-year period ending on June 30 of this year, according to Morningstar, a fund researcher.
JPMorgan’s efforts have been lucrative. The bank collects a fee on every dollar that it manages.
Such financial incentives, industry experts say, can create potential conflicts. The worry is that banks will favor their own product for profit reasons rather than focusing on clients’ interests. It is one of the major reasons many of JPMorgan’s rivals have backed away from selling their own mutual funds.
JPMorgan defends its strategy, saying that customers want its funds and that it has “in-house expertise.”
One of the bank’s core offerings is the Chase Strategic Portfolio, which contains roughly six investment models. These investments, which contain funds created by JPMorgan and competitors, are intended to provide ordinary investors with diversified exposure to stocks and bonds. The bank heavily promotes the Chase Strategic Portfolio in its branches around the country.
The product comes with a double layer of fees. Besides the underlying cost for its mutual funds, JPMorgan also collects an overall management fee.
Investors pay as much as 1.6 percent of assets annually. The bank says the average fee is closer to 1.2 percent, adding that competitors charge as much as 2.75 percent for similar products.
Prospective clients do not have a true sense of the product’s returns. Marketing documents for the Chase Strategic Portfolio highlight theoretical returns, even though many of the models have actual three-year returns, which were lower.
The bank said individuals who invest in the product are provided with actual performance. JPMorgan further noted that models in the Chase Strategic Portfolio, after fees, had gained 11 percent to 19 percent a year on average since 2009, which the bank says is competitive.
JPMorgan says it follows industry standards in its marketing. The firm says its common practice is to wait until all the components of the portfolio have a three-year return before citing performance in marketing efforts. The bank is currently preparing to add the real returns to sales materials.