May 24, 2024

DealBook: Ex-Brokers Say JPMorgan Favored Selling Bank’s Own Funds Over Others

Given what the customer is paying, they should be getting a lot more performance for their money, said Geoffrey Tomes, who left JPMorgan in 2011.Librado Romero/The New York Times“Given what the customer is paying, they should be getting a lot more performance for their money,” said Geoffrey Tomes, who left JPMorgan in 2011.

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 funds that 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.

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 KL 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.”

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DealBook: MF Global Said to Be in Deal Talks With Interactive Brokers

11:01 p.m. | Updated
Jon S. Corzine, whose political ambitions came to a halt nearly two years ago when he was defeated for re-election as governor of New Jersey, is running out of time to prevent his revived Wall Street career from collapsing in failure.

His firm, MF Global — a powerhouse in the world of commodities and derivatives trading but little known outside Wall Street — was working frantically toward a potential sale late Sunday.

Those discussions, which narrowed to one bidder, Interactive Brokers, came after investors — worried that MF Global was too vulnerable to the fallout from Europe’s debt crisis — deserted the firm, making it the first American financial institution to fall victim to the sovereign debt woes.

If the firm is unable to sell itself, other options, including bankruptcy, await. MF Global has hired restructuring and bankruptcy law firms including Skadden, Arps, Slate, Meagher Flom, said people briefed on the matter but unauthorized to speak publicly. One option is for MF Global to follow a precedent set by Lehman Brothers in 2008 by seeking bankruptcy protection for the parent company while selling some assets to Interactive Brokers.

Other Wall Street firms have not been spared damage from the European debt crisis. Shares at firms as large as Morgan Stanley fell this month over concerns that they were exposed to Europe’s troubles. And investment banks and brokerage firms are still licking their wounds from market volatility that has hurt trading operations.

MF Global began buying the debt of European countries like Italy, Portugal, Spain and Ireland last year, in a bet that the discounted prices of those bonds would soon recover. Its gamble, though, went sour, suffering as Greece’s troubled economy spread woes across the Continent. Although European leaders appeared to make progress toward resolving those problems last week, and other firms rebounded, MF Global continued to suffer.

The last-ditch rescue effort is a major blow to the reputation of Mr. Corzine, 64, who formerly co-led Goldman Sachs and was also a United States senator. With a sale of MF Global, Mr. Corzine’s role at the firm will almost certainly end, though he is expected to receive a severance payment of nearly $12.1 million.

Still, the departure will be bitter for Mr. Corzine, whose first stint on Wall Street ended with his ouster from Goldman Sachs. Along with Henry M. Paulson, another Goldman co-chief executive, who would later become Treasury secretary, Mr. Corzine, a former trader, led the firm through the Asian financial crisis of 1998. But trading losses in the last quarter of that year, on top of ill will within the firm over the decision to go public, led to Mr. Corzine’s exit in January 1999.

He revived his career with a successful run for the Senate from New Jersey in 2000, and left the Senate in 2005 to run for governor of New Jersey. A weak economy and a corruption scandal helped Christopher J. Christie defeat him for re-election in 2009.

Mr. Corzine’s arrival at MF Global in March 2010 was meant to be a triumphant return to Wall Street and to bond trading after a long absence. Though it is has operations worldwide, MF Global has just 2,800 employees, making it a fraction of the size of Goldman or Lehman.

Throughout the weekend, regulators focused on completing a deal that would sell at least a portion of the firm, a move that would avert a messy bankruptcy. But given its relatively small size, the firm is unlikely to send shockwaves in the financial system.

Most of MF Global’s business involves executing and clearing trades in commodities and derivatives for clients like hedge funds. When Mr. Corzine joined, he sought to transform it into a full-fledged investment bank, in part by making riskier trades using the firm’s own capital.

A large part of that strategy backfired, as analysts and regulators worried about $6.3 billion in bonds issued by Italy, Spain, Belgium, Ireland and Portugal. By contrast, the much larger Morgan Stanley disclosed this month that it had just a $2.1 billion exposure to Europe.

Regulators were less confident in MF Global’s wager, asking it in August to raise the amount of money backing its bonds. The firm complied, though it argued that the bonds were trading at a few cents below par value.

Analysts appeared unimpressed. Late on Monday, Moody’s Investors Service downgraded the firm’s credit rating, citing both weak financial performance and its European bond holdings. The next day, the firm reported a $186 million loss, its fourth loss in six quarters.

Two days later, both Moody’s and another major agency, Fitch Ratings, downgraded MF Global to junk status. Such a move is disastrous for a financial firm, since it limits the number of trading parties willing to do business and raises borrowing costs.

Just as important, it can also scare customers, especially after the toppling of bigger firms during the financial crisis, like Bear Stearns and Lehman.

As of Friday, only a small percentage of customer money flowed out MF Global’s door, according to a person briefed on the matter. By the end of last week and through the weekend, Mr. Corzine and his advisers at Evercore Partners had called seemingly every major Wall Street firm, offering to sell MF Global, or at least some of its businesses or trading positions. While the firm had held talks with another potential buyer, Jefferies Company, by Sunday evening Interactive Brokers appeared to be in pole position.

Founded in 1977 by its chief executive, Thomas Peterffy, Interactive Brokers is a discount brokerage firm that places trades for customers on 90 exchanges.

The two firms share a deal history of sorts. In 2005, both competed for assets of Refco, which had filed for bankruptcy. MF Global emerged the victor, bidding $323 million for Refco’s assets.

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Stocks Settle After Rally

Stocks in the United States eased back on Friday from their biggest monthly rally in decades, ending relatively flat as the euphoria over Europe’s plan to address its sovereign debt crisis evaporated.

For the week, the three main indexes on Wall Street closed more than 3 percent higher, however, lifted mostly by the surge on Thursday that followed the announcement of the latest European rescue plan. The broader market in the United States, as measured by the Standard Poor’s 500 stock index, moved back into positive territory for the year.

But on Friday, some of the lustre started to wear off as analysts focused on lingering doubts about whether the European plan would restore growth or bring long-term solutions to the sovereign debt problems in the countries that share the euro.

“The enthusiasm is fading,” Guy LeBas, a strategist at Janney Montgomery Scott, said in a market commentary.

The ratings agency Fitch said that progress needed to be demonstrated in several areas: achieving a broad-based economic recovery in the euro zone, reducing government budget deficits, and stabilizing and then reducing government debt ratios. Otherwise, it added, financial market volatility and downward pressure on sovereign ratings would continue.

At 4 p.m. on Wall Street, the Dow Jones industrial average was up 0.18 percent, and the S.P. was up 0.04 percent. The Nasdaq was down 0.05 percent.

The Euro Stoxx 50 index of euro zone blue chips closed down 0.6 percent, while markets in Britain and Paris were also slightly lower. Germany’s DAX was up 0.13 percent.

While some trading this week in the United States was inspired by corporate earnings, reports of mergers and economic data, the financial markets were mostly focused on the prospects for some kind of agreement on a way to resolve Europe’s debt problems.

Those hopes helped stocks to rise on Monday, but on Tuesday they sank after another jolt from the European Union: the abrupt cancellation of a meeting of finance ministers that was meant to precede the summit meeting that eventually resulted in the final plan.

Stocks rose again on Wednesday and then powered higher on Thursday around the world following the marathon summit meeting in Brussels.

“There is not enough detail around what is going on in Europe and until you get more clarification, you will probably get some days where you will see swings like this,” said Laura LaRosa, the director of fixed income at the investment and wealth management firm Glenmede in Philadelphia.

Still, the S.P. 500 was up 13.58 percent so far this month, its highest monthly gain since October 1974, when it rose 16.3 percent in the month.

Ross Junge, the chief investment officer for fixed income, at Aviva Investors North America, said the combination of modestly improving economic data recently for the United States, and lower euro zone risks contributed to a “modestly positive” outlook for the credit markets.

“The key impacts from the announcement are investors’ increased confidence that the threat of a near-term systemic financial crisis will be avoided and the potential spillover risks to the U.S. economy and financial institutions should be reduced,” Mr. Junge said in a market commentary. “However, there will likely be additional bumps along the way and therefore we believe the markets will remain volatile.”

Ms. LaRosa predicted the price on the benchmark bond would rise slightly, as the market remained unsteady.

The United States 10-year Treasury bond yield was 2.31 percent, down from 2.39 percent on Thursday.Asian stocks closed higher on Friday.

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DealBook: Venture Capital Fundraising Tumbles in Third Quarter

With the market for initial public offerings still on ice and dark clouds looming over the United States economy, the venture capital industry is struggling to raise money.

Venture capital firms raised $1.72 billion in the third quarter, the lowest level since 2003, according to a report released on Monday by Thomson Reuters and the National Venture Capital Association. The amount also represented a 53 percent plunge from the period a year earlier. In all, 52 firms managed to raise money in the quarter, a 4 percent decrease.

The industry started the year on a strong note amid soaring enthusiasm for fast-rising Internet companies like Facebook and Groupon. Several major firms, which managed to get shares in these companies early, were able to parlay their success into big fund-raising rounds. Accel, for instance, one of Facebook’s earliest backers, announced in June that it had closed two funds, totaling $1.35 billion in new capital.

But recent market volatility has started to wear on the industry. Venture-backed companies, including Groupon, have delayed their public offerings. In the third quarter, just five venture-backed companies went public. Valuations, meanwhile, have started to tighten across the board, according to analysts.

“The quarter’s low fund-raising numbers are reflective of ongoing challenges within the venture capital exit markets,” Mark Heesen, president of the National Venture Capital Association, said in a statement. “Until we begin to see a steady and sustainable flow of quality I.P.O.’s which return cash, limited partners will remain on the sidelines, and the venture industry will continue to contract.”

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DealBook: Groupon Weighs Delay to I.P.O.

Groupon headquarters in Chicago.Tim Boyle/Bloomberg NewsGroupon headquarters in Chicago.

Groupon is considering pushing back its long-awaited initial public offering amid the ongoing market volatility, two people briefed on the matter told DealBook on Tuesday.

While the online coupon giant had been hoping to go public by the end of this month, it is studying the market conditions and may push the timing of the offering back, the people said. While it had been considering holding a roadshow for investors next week, that is likely off the table for now.

Few companies would consider braving choppy stock markets to go public, even those with I.P.O.’s as eagerly awaited as Groupon. Its offering was one of the most anticipated of the fall, the latest in a line of new Web giants that have sought a stock market listing.

Another issue that Groupon will likely have to address is an internal memorandum from its chief executive, Andrew Mason, that quickly found its way into the public sphere. The memo, which promoted the company’s growth and strength against rivals, raised concerns about whether the company had violated the mandatory “quiet period” that applies to companies waiting to go public.

As it has with other companies, the Securities and Exchange Commission has been reviewing Groupon’s prospectus. One possible outcome is that Groupon will need to again amend its I.P.O. filing to include the memo from Mr. Mason and provide additional data to back up his assertions.

This would not be the first time Mr. Mason’s team has tangled with regulators. In August the daily deal site dropped a controversial accounting metric, called “adjusted consolidated segment operating income,” or A.C.S.O.I., after pushback from the Securities and Exchange Commission.

Representatives for Groupon and the S.E.C. declined to comment.

Started less than three years ago, Groupon has emerged as one of the fastest rising start-ups in the technology sector. The company’s valuation has soared in the past year, turbo-charged by increasing sales and early takeover interest from technology giants, like Google and Yahoo. It recorded $878 million in net revenue for the second quarter — a 36 percent increase from the previous quarter.

But the site, the largest of its kind, has drawn sharp criticism from retailers and analysts who question its ability to reduce its marketing expenses and sustain its growth rate. It has also confronted some setbacks abroad, most notably in China, where it is facing stiff competition from a swarm domestic players. Yet despite its challenges, Groupon is expected to be one of the largest public offerings in technology this year. Before credit fears roiled equity markets in August, Groupon’s team was eying an I.P.O. at a valuation near $30 billion, according to people familiar with the matter.

News of Groupon’s deliberations was reported earlier by The Wall Street Journal online.

Evelyn M. Rusli contributed reporting.

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Bucks: The Risks You Can Control

Paul Sullivan, in his Wealth Matters column this week, writes that a stock market dive or the debt debate in Washington are events you have no control over. But he says there may be risks in your portfolio that you can control.

And those risks may be ones you don’t usually consider. Do you, for example, know the primary investments in your various mutual funds? You may be surprised to find out that the same companies are playing the dominant roles in all your mutual funds. Or are you working with several financial advisers who do not know what the others are doing?

In a time of market volatility, controlling your own risks may be the way to give you more peace of mind.
Tell us your thoughts below.

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