Although it’s been gone for a long time now, I always admired, the St. Louis based brokerage, A.G. Edwards and its CEO while I was growing up, Ben Edwards. I met him one time at a wedding while I was in college and we spoke for five or ten minutes.
As you might expect, he gave a quick spiel about how great the company was and how important it was that they were independent. The centerpiece of his independence argument was that they didn’t have their own family of mutual funds that they sold to clients.
To be honest, I wasn’t that impressed with this argument, mostly because I thought nobody would do that. It turns out, I was wrong. In fact, more than 20 years later, JP Morgan is being investigated for steering their private wealth clients to JP Morgan funds over those offered by outside funds.
The Wall Street Journal reported that the Securities and Exchange Commission (SEC) has joined the Office of the Comptroller of the Currency (OCC), a bank regulator, are investigating the banks sales practices (see the article here).
According to the WSJ, as recently as July, a sample conservative portfolio allocation constructed by the bank allocated 56 percent of funds to JP Morgan products and 44 percent to other providers.
JP Morgan said that unless products were substantially different than their own, their recommendations (and managed account) would be high in JP Morgan funds, possibly as high as 100 percent.
Now, in defense of JP Morgan, their funds have been doing well in recent years. According to Morningstar, more than three quarters of their funds have been their peer-group average in the past three years.
The bank recently launched an exchange traded fund (ETF) that I find pretty interesting and reasonably priced at 0.38 percent. It only started trading on June 30th, so I won’t give it a lot of scrutiny until three years have passed, but the point is that JP Moran funds aren’t inherently bad.
I can practically hear the discussions in the management suite: ‘we have good funds and it’s more profitable if we use them instead of someone else’s, so why shouldn’t we?’
The issue, in my opinion, is that there’s a classic conflict of interest. When a broker recommends purchasing funds created by their employer, it’s hard to know where the broker’s true loyalty is to the client or the firm.
It’s possible to rationalize using in-house products, but is it really the right thing to do? We think not. Instead, we serve one master: the client.