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The Short End of a Corrupt Giant

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Most of us are aware of the story of David and Goliath from the Holy Bible. According to the Book of Samuel, Goliath was a Philistine warrior of tremendous strength and size who was defeated by a much smaller, David. While traditional interpretation has focused on God’s triumph over evil, a more secular and popularized version breeds a tale of the triumph of the underdog.

We can all appreciate someone like David, who against all odds was able to achieve something great when his back was against the wall. Similarly, most of us are able to identify the “Goliath’s” in our lives. And while a person can overcome what seems like unconquerable odds, what if Goliath cheats? In other words, what if he was so great that he could actually dictate the outcome? At least if it’s a fair fight with the odds stacked against you there is a chance. But what if your loss was already unknowingly cemented in time?

Let’s give an example. The New York Times recently reported the story of an ex-JP Morgan Advisor who started receiving flak from his former employer for not wanting to recommend JP Morgan mutual funds to his clients. Johnny Burris was based out of the Sun City West Branch of JP Morgan Chase, right outside of Phoenix, AZ. According to the NY Times article, Mr. Burris complained as early as 2013 about management pressuring brokers to sell the bank’s mutual funds. Once the media garnered attention about the practices (a.k.a. Mr. Burris began blowing the whistle), JP Morgan started to create, what Mr. Burris alleges, false complaints from former clients about Mr. Burris’ behavior.

While this may not seem like a huge obstacle for Mr. Burris, it is important to remind readers that any complaints filed with FINRA (Financial Industry Regulatory Authority) are recorded and are available for view by the public. Any client can look up their broker and/or investment advisor and see if there have been any complaints filed against them. We believe most people would completely disregard any broker/advisor that had a single complaint filed against them let alone multiple.

When clients were approached about their filed complaints, all of them said that their words had been misrepresented. As the article points out, former client Carolyn Scott said she had signed the complaint that an employee from JP Morgan Chase had drafted, but didn’t read the fine detail. The JP Morgan employee had told her that signing the document could help her “get some money back.” Ms. Scott said, “I was stupid enough not to read it myself. I had no problems with Johnny. No problems whatsoever.”

You can imagine how Mr. Burris felt trying to rebuild his practice with a falsely tarnished record that was out in the open to the public. This is all because he decided to take on the Goliath that is JP Morgan Chase; one of the largest financial institutions in the entire world. Beyond just engaging in simple banking, JP Morgan is also involved in wealth management and fund management. By pushing their wealth advisors to sell JP Morgan products, they are able to double dip into the assets they manage: first for the investment advice and second for the fund management. Sounds like a very profitable way of doing things! Unfortunately, JP Morgan is not stellar at either of these practices. Oh yeah, not to mention the ethical issues involved in doing so.

We have written before about the mutual fund performance from JP Morgan Chase here. Just a quick recap, we examined the performance of the top 10 JP Morgan funds by assets under management who have at least 20 years of performance history. After adjusting returns for the known dimensions of expected return using the Fama/French 3 Factor Model, not a single fund had produced a statistically significant alpha at the 95% confidence level. In other words, their outperformance was not reliable enough to say with a high degree of confidence that we would expect it to persist into the future. In even simpler terms, you would have been better off just buying and holding low cost index funds. You can see the details in the chart below.

Knowing the underachievement of the JP Morgan Chase lineup, we can now understand the moral dilemma that Mr. Burris was up against. Why would anybody with any sort of conscience recommend something when there was a better alternative? While the quick answer may be, “they don’t have a conscience,” we believe the more accurate answer has to deal with the simple understanding of opportunity cost. Many investment professionals have their own responsibilities, like family, that they need to take care of. By trying to step out of what has become the “normal” way of doing things in wealth management, they are exposed to the threat of not being able to take care of their most important asset. Most seasoned professionals who are doing the job for the right reasons are constantly managing conflicts of interest within their own practice. How do we minimize conflicts of interest as much as possible given the environment we work in? That is the question that most advisors wake up and deal with every single day. We have covered this topic before.

The story of David and Goliath reminds us that people can beat the odds that are stacked up against them and accomplish more than what society expected. Unfortunately, not all of life’s competitions are fair. There are institutions in the world we live that have the power and resources necessary to take fairness out of the equation. Understanding first the need to serve clients is one of the hallmarks of an independent investment advisor. Further, successful RIAs can grow and attract those individuals in the industry who find themselves in a constant moral dilemma. Forget the type of investment advice for a second. Just creating an environment of professional debate about the best way to serve clients will lead to better outcomes for those we are supposed to serve. Not forcing products down both professionals’ and clients’ throats to increase profit margins. This is the modern David and Goliath in our industry.

Let’s take them down.