Some current and former brokers at JP Morgan have said they were encouraged to push the bank’s own products in favor of external products, the New York Times reported.

The comments, including some made by Geoffrey Tomes, who left JP Morgan last year and became an advisor at Urso Investment Management, relate to products like the Chase Strategic Portfolio. Created in 2008, this is a program sold through Chase US retail branches which gives investors access to 26 JP Morgan Asset Management investment portfolios.

“Within the JP Morgan Private Bank, we use both JP Morgan and third-party managers in our portfolios. Our due diligence team uses a rigorous process to select the best managers for our client portfolios,” a spokesperson for the bank told Family Wealth Report.

“When JP Morgan has best-in-class products, we use JP Morgan managers, but if JP Morgan does not have the right products for our clients, we use third-party managers or we will  customize a solution. A significant portion of client portfolios is invested with third-party managers.”

It does not break out the proportions of third party and proprietary fund holdings for clients at the private bank, but the spokesperson said advisors receive “no incentive – financial or otherwise – for giving preference to Chase Strategic Portfolios or JP Morgan products.” 

According to the report, the bank itself earns an annual fee of up to 1.6 per cent of assets in the Chase Strategic Portfolio, as well as a fee on the underlying JP Morgan funds.

Open architecture

The concept of “open architecture” – which is an attempt to decouple product manufacturing from advice – has been one of the biggest debates to dominate the industry in recent years.

Neuberger Berman, an independent firm offering portfolio and wealth planning services including proprietary funds, emailed this statement on the issue: “For clients with Neuberger Berman funds in advisory accounts, the investment advisory fee for those funds are waived.”

According to the NYT article, of the banks, Morgan Stanley and Citigroup have “largely exited the business” of offering their own funds. JP Morgan is the only bank that makes it into the top ten fund companies as analyzed by Strategic Insight.

At the end of 2011, banks made up around 7 per cent of investment companies, according to the Investment Company Institute Factbook.

Some people – often from the “pure advice” industry – say that open architecture is not enough though, as referral fees can still be embedded in the model. These people advocate passing all investment management costs onto the investor and using a fee-only model for advice.

“I was working in the banking business managing clients and I realized clients’ interests weren’t being well served, because we were trying to sell bank products, and then when open architecture came in it became ‘who is paying the biggest referral fee?’,” GenSpring’s Santiago Ulloa told this publication last year.

In the UK, a program of reforms called the Retail Distribution Review is due to come into force at the start of 2013, aimed at driving out use of commission payments and moving the industry to a fee system.

Costs and performance

The crux of the argument is maximizing the performance of an investor’s portfolio net of all fess – as this is the amount that, compounded over years, will form his or her wealth. For this reason, some have countered the arguments for disaggregation of products and advice by saying that if you can achieve the best performance at lowest cost through a single provider, this is what is best for the investor. However, barriers remain, such as having that kind of talent in-house, covering a whole range of asset classes, while having a system of remuneration which encourages employees to put the client first.