Promoting the In-House Product: JP Morgan/Chase Yesterday, The New York Times ran a front-page story about the pressure imposed on financial advisors (brokers) by JP Morgan to push the company’s products on clients. There was something familiar about this story that I couldn’t put my finger on at first. After typing a couple of key words in Google, I quickly refreshed my memory. The paper ran a very similar story in July 2012 (“Former Brokers Say JPMorgan Favored Selling Bank’s Own Funds Over Others”). The first story was much more informative and detailed than yesterday’s installment.
Yesterday’s article (“Selling the Home Brand: A Look Inside an Elite JPMorgan Unit”) is as old as the brokerage and investing businesses, and there's not much news in this story. Because it's old news, it certainly didn’t deserve a spot on the front page of the Sunday paper. Sadly, you could insert the name of any financial organization into this article, find similar practices, and run the same story.
|The Replacement (1999)|
The two pieces from The New York Times illustrate two common practices in money management. First, if a firm has an in-house proprietary product, it will always be tempted to give it a preference, and for good reason: the profit margins are always higher. This practice persists until a sufficient number of clients or financial advisors complain enough. Those complaints then prod the regulators to open up inquiries, and the company grudgingly opens up its offerings and retools its training program to de-emphasize the offending practice. Unfortunately, someone else in financial services always finds the lure of profits so tempting that they introduce a “proprietary product” that repeats this offensive behavior. According to the July 2012 article, JP Morgan did just that. They stepped into the market to emphasize their own products as Citi and Morgan Stanley were exiting the practice.
The article also highlight the problem of packaging investment advice and products for folks who have some savings but aren’t millionaires. Marketers sometimes refer to this group as the “mass affluent. As I’ve noted before (see for example, “Hard to Find: Retirement Help at a Reasonable Price [January 22, 2013]”, finding investment advice at a reasonable price is particularly hard for people who don’t have enough money to gain access to the services of a private bank or an institutional-quality money manager. The task is made even harder because the marketing pitch often obscures the performance, risks, and costs of the proposed product. As the Times article points out, all too often the client has been reeled in before the investment advisor unveils the particulars.
In order to make money from the mass affluent investor and provide something more than a toll-free number and access to some financial tools on a website, most firms have to steer the client toward in-house products. If their financial advisors (brokers) recommend too many third-party products, the economics don’t work too well for JP Morgan/Chase or anyone else in the business.
Historically, JP Morgan has had a reputation for providing high quality money management services to its institutional and high net worth clients. However, as they’ve tried to rapidly expand into new markets, they’ve succumbed to the temptation of being an asset gatherer, rather than a money manager.