Shadow Manager

JP Morgan: A Case Study in What is Not a Fiduciary!

Shadow Manager

The investment advisory industry has grown tremendously in the last 10 years. We are no longer in the simple world of retiring with a pension and not having to worry about making it across the proverbial finish line. Employees and retirees are now facing uncertainty in their ability to meet their long-term financial goals. Hence, many professionals have not accepted their calling in helping individuals deal with that uncertainty. Unfortunately, not all advice is the same. Or more correctly stated, not all advice has the client’s best interest in mind.

This may seem like a foreign idea to most investors since we do not usually have to question the advice of most of the professionals we deal with. When we go to the doctor to get an opinion, we truly believe that the advice from the doctor is in our best interest. What would be the incentive for the doctor not to give the best advice? Or when we get the opinion from a lawyer in a particular legal situation, we would think that the advice is in our best interest. While it is always a good idea to get multiple opinions about a particular medical or legal situation, we at least are basing our decision on the merits of the advice given. There is no question of some underlying motive.

This is not the case for professionals giving financial advice. In fact, while doctors and lawyers are required by law to act as a fiduciary for their client, only a subset of financial professionals are held to the same standard of care. Here is a real life example: the Wall Street Journal recently published an article about JP Morgan’s talks with the SEC to settle a dispute about steering their private wealth client’s money towards JP Morgan’s proprietary mutual funds. While the practice is legal, it is heavily scrutinized by the SEC since it creates a very apparent conflict of interest. While clients are already paying a fee in the range of 1.00-2.00% for JP Morgan’s investment advice, they are also paying 1.00-2.00% to be invested in JP Morgan’s mutual funds, thus allowing JP Morgan to “double-dip” from their clients’ portfolios.

How can JP Morgan get away with this? Well, it is because they are acting as a broker-dealer and not as a registered investment advisor. Two completely different standards of care apply. A broker-dealer falls under the “suitability rule,” which has about as much interpretation as a work of art: pretty much wide-open. A registered investment advisor is held to the same standard of care as a doctor or a lawyer in which they must act as a fiduciary for their client. There is very little wiggle room on this one.

Now if JP Morgan did in fact have the best performing mutual funds, then it could be argued that they are in fact acting in their clients’ best interest. But as we are about to show you, this seems to be motivated by increasing JP Morgan’s take-home then it does doing what is best for the end client.

We examined the top 15 mutual funds by assets under management from JP Morgan to see if their funds were in fact some of the best performing strategies for investors. We have included “alpha” charts, which track the relative over and underperformance of each mutual fund compared to their Morningstar assigned benchmark for every year since their inception. The t-statistic as well as the number of years needed in order to be 95% confident that the fund manager has displayed skill in their relative performance is included. Here is a quick summary:

  • All 15 funds did not have an “alpha” that was statistically significant at the 95% confidence level.
  • 6 funds actually had actually underperformed their benchmark since inception
  • The funds that had a somewhat high t-statistic have only been around for 6 years or less.

To give a illustrative summary of JP Morgan’s fund performance, here is a chart focusing primarily on the statistical significance of JP Morgan’s US mutual funds with at least 20 years of data. The y-axis is the annualized alpha or relative performance against each fund’s Morningstar assigned benchmark. The x-axis is the standard deviation of that alpha overtime. A combination of these two metrics allows us to calculate the t-statistic. Buttons lying in the green region of the chart have a statistically significant alpha at the 95% confidence level. Buttons lying in the red regions of the chart do not have a statistically significant alpha. As you can see below, not a single JP Morgan fund has a statistically significant alpha.

As expected, we can now see that investment advisors from JP Morgan did not have a performance-based reason for placing their clients’ assets in JP Morgan mutual funds. Let’s now take a look at the fees of these mutual funds compared to a passively managed alternative that their clients could have been invested in.

JP Morgan Fund Fee Comparison
JP Morgan Fund Fee Passive Alternative Fee Difference
ONGAX 1.28% VASGX 0.17% 1.11%
WOBDX 0.57% VBTLX 0.07% 0.50%
ONGIX 1.32% VSMGX 0.16% 1.16%
OICAX 1.23% VSCGX 0.15% 1.08%
JNUSX 0.93% DFIVX 0.43% 0.50%
JMUEX 0.64% DFUSX 0.08% 0.56%
HLIEX 0.79% DFLVX 0.27% 0.52%
JEITX 0.33% DGEIX 0.31% 0.02%
OGIAX 1.27% VSMGX 0.16% 1.11%
JNBAX 0.74% VASIX 0.14% 0.60%
JSOAX 0.88% DFGFX 0.17% 0.71%
JMGIX 0.25% DFIHX 0.17% 0.08%
SEEGX 0.93% VIGAX 0.09% 0.84%
FLMVX 0.74% VMVAX 0.09% 0.65%
HLLVX 0.55% VBIRX 0.10% 0.45%
Average: 0.83% Average: 0.17% 0.66%

As you can see, the average expense ratio for the top 15 mutual funds by assets under management from JP Morgan is 0.83%, while the average expense ratio from a passively managed alternative from either Vanguard or DFA is just 0.17%, or 0.66% lower. For a $1M portfolio, that is a difference in fees of $6,600 per year per client, which is no chump change. It would definitely seem like JP Morgan’s advice is mainly profit driven versus client driven.

The growth trend in the investment advisory business will continue as more and more investors need the help of an investment professional to navigate the uncertainties involved in retirement. It is important to know that not all advice is given with the purest intent of setting investors up for a successful investment experience. With multiple standards of care in the industry, it will be up to the investor to decipher whether or not they are getting the best advice. When vetting investment professionals, it is very important to ask whether or not they are going to act as a fiduciary for you. It is also important to be aware of the types of investments that advisor is putting into your portfolios. To minimize the potential conflicts of interest and ensuing headaches that will follow, it is important to first partner with an independent financial advisor who is held to a fiduciary standard of care. From there, you can properly vet the investment advice that the professional is giving you. To learn more about the investment advice that IFA provides for their clients, feel free to call us at 888-643-3133.

We have taken a deeper look at the performance of several other mutual fund companies and have come to one universal conclusion: they have failed to deliver on the value proposition they profess, which is to reliably outperform a risk comparable benchmark. You can review by clicking any of the links below: