WANT TO BUY A MUTUAL FUND ? / THE NEW YORK TIMES EDITORIAL ( A MUST READ )

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EDITORIAL
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July 3, 2012

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Want to Buy a Mutual Fund?

Sometimes it seems as though there’s nothing big banks won’t do to earn people’s mistrust.

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Susanne Craig and Jessica Silver-Greenberg reported in The Times on Tuesday that since the crash, several banks have built up their financial advisory businesses to cater to ordinary investors. The aim is to generate steadier returns than those on trading desks — in effect, turning to mom and pop to make up for lost boom-era profit.

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Unlike other banks, however, JPMorgan Chase has focused on selling mutual funds that it creates, in the process becoming the only bank among the nation’s 10 largest fund companies.

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Some current and former JPMorgan brokers told The Times that they felt pressured to recommend those proprietary products to customers, even when other options were better performing or less expensive. “It said financial adviser on my business card, but that’s not what JPMorgan actually let me be,” said one former broker. “I had to be a salesman, even if what I was selling wasn’t that great.”

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The result is more money for JPMorgan and less for the investor. The more assets there are in the funds, the more fees the bank collects for managing them. In one large proprietary portfolio, the bank levies an annual fee as high as 1.6 percent of assets, compared with 1 percent typically charged by independent financial planners.

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A JPMorgan spokeswoman said customers want access to proprietary funds and benefit from in-house expertise. She also said the bank always puts clients first.

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Be that as it may, what investors have to realize is that the nation’s securities laws still do not impose a fiduciary duty on brokers who give investment advice, which would require them to act in the best interest of their clients. Brokers have to recommend “suitable” investments, but that standard gives them leeway to pitch investments that boost their firm’s profits, exposing investors to misleading pitches and overly expensive products.

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Unfortunately, attempts by the Securities and Exchange Commission to write a rule to impose a fiduciary duty have been stymied by financial-industry opposition and weak Congressional support. Trust is essential, but the nation’s laws and rules have not yet raised the standard to a level that fosters trust.