Back in 2014 (June 25, to be exact), I wrote a blog called Mutiny? Brokers are Embracing a Fiduciary Standard, if Not Their Employers, about a lawsuit and counter lawsuit involving two executives in Deutsche Bank Securities’ former Private Client Group. The blog was a folo from a story on Bloomberg.com in which the pair defended their decision to leave Deutsche Bank, citing sales quotas that would “breach their fiduciary duty” to their clients; pressure to sell the firm’s proprietary products; and pressure to “create a new asset class to obscure a [proprietary] hedge fund investment.” Deutsche Bank responded with a lawsuit of its own, alleging that the brokers’ resignations were “a breach of their fiduciary duty to the Bank.”
Readers of The New York Times may recall a hauntingly similar article by Nathaniel Popper from last Thursday (Dec. 3) about former J.P. Morgan Chase broker Johnny Burris, who had complained in a March 2, 2013 Times article that “J.P. Morgan was pressuring brokers like him to sell the back’s own mutual funds, even when the offerings from competitors were more suitable.”
Sound familiar? But in the case of Mr. Burris, rather than trying to force him to stay, J.P. Morgan went to rather extreme measures to force him to leave. Still, the Burris case is yet another example of the extent to which brokerage firms will go to protect their lucrative proprietary product revenue streams. And to my mind, further evidence of why the sale of financial products does not mix well with the delivery of fiduciary advice.
In the Burris case, it’s fair to say that he went a bit further than just complaining. According to the new Times article, sometime before the 2013 Times article, Burris “made secret recordings of his supervisors at the bank pressuring him to sell the JPMorgan mutual funds instead of similar funds from competitors.” Then he shared those recordings with “reporters and regulators,” prompting the SEC to launch an investigation. According to the Dec. 3, 2015 article in The Times, “JPMorgan is now preparing to pay more than $100 million to settle the investigation into “the bank’s marketing of proprietary funds.”
Not surprisingly, even though he had received glowing reviews from his supervisor, and had been promoted to work in the “elite” Chase Private Client Division in Sun City, Arizona, Burris was fired a few months after he went public with his concerns. And, according to The Times: “A few weeks after [the first article appeared], complaints from some of his former clients began showing up on his public disciplinary record.”
As you might imagine, those complaints undermined his “wrongful termination” claim against J.P. Morgan, and haven’t helped Burris in finding a new job, either. But then, as they say, the plot thickened.
After the hearing, Burris tracked down the three former clients who had “filed” those complaints. According to The Times, who also contacted those clients, “they all said that they felt bad when they heard that Mr. Burris had been affected by the complaints that they ostensibly had made, because they had not had negative experiences with Mr. Burris.”
What happened? According to a spokeswoman for J.P. Morgan: “one of Mr. Burris’s former colleagues had assisted the clients as a courtesy by typing up what they told her verbally, reading it back to them for accuracy, and submitting them for review.”
But when contacted by Times reporter Popper, “all the clients involved said that the complaints did not reflect their sentiments, and added that [the colleague] had not read the complaints to them before having them sign the documents.”
And one of them, who supposedly wrote his own complaint, revealed to The Times that he “can neither read or write.”
After speaking to his clients, Burris wrote a letter to his former firm, asking: “How do you believe I feel, knowing that the bank solicited, drafted false, erroneous complaints about me?” Strong words, but the evidence does seem to point in that direction.
The newspaper summed up the entire story this way:
“His case has been a reminder of how the asset management business can expose the banks to conflicts of interest, especially when they run their own mutual funds.”
I would add that in my experience, people tend to do what they are financially incentivized to do. Occasionally, we come across people, like Johnny Burris, who prefer to “buck the system” and put other people first. But as this case shows, the “system” usually doesn’t like it. Think of all the people who had to be involved in this reaction to Burris. Did the folks at the top of JPMorgan know about it? Probably not: all they had to do was create the incentives, and let the system do its thing.
This is exactly why I believe it’s so important for financial advisors to be incentivized to do only one thing: to help clients grow their assets so they can reach their financial goals.
The only business model I’ve seen in retail financial services that creates this incentive is independent RIAs: which was created specifically by advisors who wanted to put themselves on the same side of the table as their clients. Not coincidentally, the rest of the financial services industry doesn’t much like them, either.