JP Morgan outed by whistleblower

Talk about conflicts of interest! A recent story ran around the financial world as JPMorgan & Co. recently set the record for a $30 million whistleblower award as first reported by Bloomberg.

This is not the first time we have read about concerns about client’s vs firm’s interests among the financial giants.

Back in 2012, Greg Smith published his explosive op-ed in the NY Times Why I am leaving Goldman Sachs which was followed by a best-selling books about a young man who rose from a college intern to become a managing director of the firm, to walk away because he could no longer live with what he perceived as conflicts of interest of putting the firm ahead of clients. It was a shocking picture of what many considered to be one of the most prestigious leaders on Wall Street. Though not entirely unsurprising.

The whistleblower programs under the SEC and CFTC have allowed regulators to use their power to expose those that have neglected to notify their wealthy asset management clients of specific conflicts of interest. Going back to December 2015, JPMorgan had agreed to a record $367 million settlement for not informing clients about putting their money into various funds that lead to more fees for the company.

Caught Red Handed

JPMorgan is the largest U.S. bank in terms of assets and did not communicate to their clients the validity of their investment advice as conflicts of interests generated profits for the bank. For such an esteemed and respected institution the news is quite stark, in contrast to what many would expect from JP.

The institutions such as JP Morgan and Goldman are behemoths that through their layers of infrastructure offer to guide clients through the wealth management process. They manufacture actively managed products that propose to either generate returns in excess of market benchmarks, generate alpha, or provide their clients with market returns with less risk. These products, of course, produce high fees compared to passive investment options using index funds or ETFs.

When it comes to actively managed funds, managers may find themselves in conflicts of interest when it comes to meeting their goals as opposed to the goals of their clients. Actively managed funds are not obliged to replicate the benchmark index because their goal is to beat the market–or at least, try to. Research shows that the majority of active products >85% fail to produce long-term returns over market benchmarks when you account for fees, and taxes. However, the financial world is built on the lure that you can come into the casino each day and come out a winner. The conflict arises when the firms can make higher fees on these products and the client and firm interests are misaligned.

In contrast to JPMorgan’s actively managed funds, index funds follow a portfolio that aligns with the market index providing investors with their share of market returns as low cost. By setting your financial goals and understanding your risk you can create a portfolio designed just for you, with no fear of a conflict of interest because ultimately it’s your interest that matters most. Actively managed funds may be based on prior experience and lead to judgments in making decisions that may not be in the best interest of clients, but for themselves as in the case of JPMorgan.

It is a zero-sum game when you try to beat the stock market. Warren Buffett once said,

“When millions of dollars are managed by Wall Streeters charging high fees, it will usually be the managers who reap outsize profits, not the client.”

When it comes to your wealth, transparency and honesty are keys to maintaining a trustworthy relationship in managing your money. We all want to hit our financial goals, but I don’t think anyone wants to put their future at risk when it comes to murky investment choices.

A better option for investors

The economy goes through cycles of growth and recession, and markets rise and fall. But if you look back over time, equities have performed the highest compared to bonds. The challenge is to select the right mix which is called asset allocation that allows you as an investor to stay the course when markets become volatile.

Rather than trying to find a needle in the haystack that will provide huge returns, why not just buy the haystack in the form of index funds. High fees for actively managed funds are just inconveniences as more diversified portfolios in index funds provide low portfolio turnover and low operating expenses.

M3 wants to advocate for you and to make sure you are on track to reach your financial goals. Therefore we start with planning to map out how to pursue your financial goals. Next, we help you to find your risk level with a tool that will reveal the range that allows you to invest and not worry about market swings. Finally, we create a portfolio of low-cost index products that address both your financial goals and risk level.

We want you to receive suitable value through planning by using our low touch, automated investment processes available 24/7. M3 wants to look out for you and provide you with confidence. We will always put your needs first. You are our only priority.