“Private Banker”

The rebranding of JPMorgan stock brokers into “private bankers” was one of the more interesting ways I’ve seen the business of selling securities to retail households evolve over the years. It was a post-crisis maneuver that added cachet to what was essentially a mutual fund selling program with added links to the deposit, lending and credit card side of the bank.

For a million-dollar household client, referring to one’s stock broker as “private banker” must have seemed pretty cool. “I’ll call my banker and see what he thinks” sounds way more aristocratic than “I’ll call my broker.” Especially as the term (and profession) of retail broker has been slowly phased out of existence over the last decade.

The thing about having a “private banker” at JPMorgan, unfortunately, is that clients were not getting fiduciary advice. They were getting a lending concierge who could also sell them investment products – and the products, in many cases, were those that paid the representative more. Specifically, according to a settlement with the regulators, these products were proprietary JPMorgan funds or hedge fund programs, which may or may not have been the best available, and were most definitely not the least expensive options. Regulators took issue with the lack of disclosure…

JPMorgan Chase & Co. will pay more than $300 million to settle U.S. allegations that it didn’t properly inform clients about what the Securities and Exchange Commission called numerous conflicts of interest in how it managed customers’ money over a half decade.

The largest U.S. bank by assets failed to tell customers that it reaped profits by putting their money into mutual funds and hedge funds that generated fees for the company, the SEC said in announcing $267 million in penalties and disgorgement against JPMorgan. The bank agreed to pay $40 million more as part of a parallel action by the Commodity Futures Trading Commission.

The person who blew the whistle on this whole thing, said to be a former SEC lawyer, was just awarded $30 million for his trouble at the end of last week.

To me, the disclosure is only part of the issue. I find fancy investment advice and fancy products to be problematic in and of themselves, regardless of how many disclosures are made in the sales process.

A recurring theme here on this blog is that cachet is the enemy for most investors. It’s used to sell sizzle, not steak, and to justify investment programs that are either conflicted or too expensive to lead to good outcomes – and probably some combination of both. There is a certain portion of the population that will always conflate expensive with good, and get turned on by words like exclusive, private or boutique. And in many industries, it does pay to pay up for luxury – a Mercedes-Benz is demonstrably better than a Honda.

But in financial services, to a degree, this works in the opposite way – the less money you spend, the more money stays in your account to compound. But a captive financial sales force will almost always be paid more to sell you the opposite of this. It’s not the fault of the salespeople, they’re given incentives and then human nature takes over. Why wouldn’t a bank’s employees want to maximize the earnings potential of each hour of their time?

Some ways you can be smarter about consuming investment advice:

Avoid taking advice from firms that produce and market their own in-house asset management products.

Remember that publicly traded brokerages and banks have a fiduciary duty to their shareholders first and foremost, and that this virtually guarantees conflict at some point with what’s best for you – if not today, then certainly in the future.

Avoid working with anyone who is not willing, in word and in deed, to commit to offering you a fiduciary relationship.

Never be embarrassed about asking your advisor about how he or she is paid, and whether or not you are the only person paying them.

Don’t let having the convenience of a firm offering multiple services at once (like lending or credit cards and mortgages) lull you into accepting a portfolio that is not right for you, or that costs more than it needs to for producing favorable outcomes.

When something is being offered to you on the basis of cachet, be wary, not flattered.

Lastly, keep in mind that in bull markets, lots of conflicts and sins are overlooked or forgotten, and that it’s only during the downside of the cycle that the ugliness comes to the surface.

There are great advisors working in conflicted situations and managing these conflicts becomes a sort of career-long struggle for them. It’s admirable, but it’s not your problem as the consumer. There are plenty of great advisors working in situations that do not require this daily conflict-management effort, because they are compensated correctly from the start – not for selling one product or service over another, but for giving advice to you without commissions from a third party or additional goals they need to meet.

Seek those advisors out and ask the right questions. Leave the pursuit of cachet for people who are more concerned with optics and status than they are with achieving their goals.

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