By Neil Weinberg
(Bloomberg) -- Salespeople of all stripes know the drill. Go to the morning pump-up sessions. Hit the revenue targets. Move product or move along.
The playbook for selling everything from phones to time shares also crops up in a rarefied environment -- the Manhattan offices of JPMorgan Chase & Co.’s elite wealth-management unit. There, private bankers working with JPMorgan’s richest customers are encouraged to steer client assets into certain funds and instruments that generate rich fees for the bank, according to several former employees.
How banks cross-sell -- essentially, a “would you like fries with that” approach -- has come under regulatory scrutiny after revelations last year that Wells Fargo employees opened millions of fake accounts in clients’ names to reach sales targets. Wells Fargo admitted to a lapse and has changed its incentives. But the scandal brings an old question about banking into sharper focus: When do bank’s incentives for employees put the customer second?
There’s nothing illegal about cross-selling. Every company wants to sell its own stuff, and JPMorgan, the nation’s biggest bank, is no different. It stands out because it has so many in-house investments to offer its clients, including the biggest pool of in-house mutual funds in the U.S. banking industry. Several former employees at the private bank said the pep talks and reward system to sell such products made them uncomfortable: They felt pressured to push certain investments even when they believed others might be better for their clients.
No one is accusing JPMorgan of making up false accounts. The bank says it serves its wealthy clients by offering a wide range of investment options and discloses that it favors its own products. It doesn’t pay its bankers commissions, said Darin Oduyoye, a bank spokesman. The system benefits bank and client alike, he said.
“Clients have a number of options in financial providers,” Oduyoye said. “One of the reasons they choose JPMorgan as their primary bank is because we can offer a full breadth of investments, banking, lending and wealth advisory services. Clients expect to hear from us about all of these capabilities.”
Pay Scorecard
Seven people who worked in various roles across J.P. Morgan Private Bank in the last few years, three of them as recently as mid-2016, said they functioned less as advisers than as salespeople.
The ex-employees said days started with an 8 a.m. sales meeting in the “war room” high above Park Avenue. Then came client calls, with employees tracking sales targets on whiteboards. They would gather again before quitting time to hear about some handpicked investments -- what to sell and how to sell it. Bankers’ compensation “scorecards” measured how much revenue they were generating, these bankers said, but didn’t address how their clients’ investments were performing.
They and another dozen or so people familiar with the private bank agreed to describe its operations as long as their names weren’t used because they still work in related businesses. Current employees of the private bank declined to discuss it.
While the bankers weren’t explicitly told to push in-house funds, they said, meeting the revenue marks was all but impossible without selling the products that generate the highest fees for the bank, which include not only in-house investments but also those from partners that share their fees with the bank.
Unapproved Funds
Advisers could put their brokerage clients into other funds or instruments, but they wouldn’t get revenue credits for them, three former employees said. A mid-2016 compensation scorecard reviewed by Bloomberg referred to “unapproved” mutual funds as among the instruments that didn’t boost advisers’ tallies.
Oduyoye, the JPMorgan spokesman, said performance measures at the private bank “are designed to reflect how well bankers are serving clients as well as risk-management priorities of the firm.” He declined to say whether that represented a change in practice.
JPMorgan has in the past pitched investors on the synergies among its retail, commercial, investment banking and asset management businesses. A review of company filings and transcripts of investor calls indicates that JPMorgan has been the only big bank to break out revenue figures tied to cross-selling. Selling across the bank’s four main units contributed $7.5 billion in revenue in 2014, or more than 7 percent of all revenue, the bank said at a 2015 investor conference, the last time it provided such a figure.
Among the Best
“Cross-selling is a big deal. And we do an exceptionally good job at cross-selling. We think we’re among the best out there,” Chief Executive Officer Jamie Dimon told an investor conference in September 2012, referring to the bank’s retail business. Fifteen months later he told another conference: “We do as much cross-sell as a Wells Fargo.”
Even as Wells Fargo pushed an in-house “Eight Is Great” target for cross-selling, JPMorgan was already nearly there: JPMorgan’s retail branches sold an average of 7.9 products and services per household in 2013, compared with Wells Fargo’s 6.2, according to the latest data available from both banks. (Comparable industrywide data is elusive.)
Dimon has publicly emphasized that cross-selling must benefit customers. “We don’t like the word cross-selling because it sounds like we’re doing it for us,” he told investors in 2015.
The Wells Fargo scandal prompted regulators to take a fresh look at the practice at the nation’s largest banks. The Office of the Comptroller of the Currency, the Consumer Financial Protection Bureau and the Federal Deposit Insurance Corporation asked banks in October for information about how their sales practices may disadvantage customers. The OCC said the investigation is still under way.
Not an Objective
After the regulators’ request, JPMorgan Chief Financial Officer Marianne Lake said that an internal investigation of the bank’s sales practices had turned up sporadic problems, which she didn’t identify, but no systemic lapses. During an October earnings call with investors, she said: “Cross-sell is an outcome. It’s not an objective.”
The seven bankers, who worked at J.P. Morgan Private Bank from three years to well over a decade, said the rhythm of the workday made their office feel more like a hard-charging sales operation than a buttoned-up private bank.
Each morning the bankers in Manhattan would file into the 24th-floor conference area, senior managers in the first row, private bankers behind and stragglers standing. People at dozens of other offices around the country would call in.
Morning Huddle
The morning meeting opened with a market overview and often shifted to a discussion of specific products such as structured notes, mutual funds and private equity funds offered by JPMorgan or an outside company that gives the bank a financial incentive to sell. (JPMorgan has disclosed that certain companies pay fees back to the bank in exchange for the placements.) Later, smaller teams met for a morning “huddle” to discuss their sales targets and strategies.
Oduyoye described the meeting as educational rather than sales-driven, focusing on market events. “We take pride in the amount of time we spend educating our advisers on markets and solutions -- internally or externally -- so they can better serve their clients,” Oduyoye said.
The advisers were encouraged to offer “managed solutions” to clients, several of the former employees said. These accounts let clients set their own investment objective, like growth. Customers pay a management fee. Portfolio managers pick the products and make the trades. The bank prefers in-house products, from which it earns additional fees, the bank recently disclosed to clients of its managed products.
Many days ended with “the 4:45” -- a gathering often attended by executives from JPMorgan’s partners, including the Blackstone Group and Starwood Capital, who pitched their own new products and discussed how to sell them, according to six of the former employees. Among the hedge funds offered in the private bank’s managed portfolios, all but one shared fees with JPMorgan, the Securities and Exchange Commission said in December 2015.
Blackstone declined to comment. Starwood didn’t respond to a request for comment.
Additional Fees
The emphasis on selling was reinforced by the pay structure, which consisted of a salary and annual bonus. Five of the former bankers described the three factors listed in the pay scorecard to determine compensation -- new clients, new bank revenues and a measure of asset flows, which they said was defined as JPMorgan products such as bank loans or in-house investment funds as well as products from other firms that share fees with the bank.
Those measures were included on the compensation scorecard reviewed by Bloomberg, which also included a category called “cross-selling.”
There are cases where cross-selling by investment advisers could run afoul of regulators. Advisers who manage trusts and discretionary trading accounts generally have a fiduciary duty to prioritize the client’s interest over the bank’s. Excessive sales of in-house investments tied to those assets could raise the alarm of the government overseers reviewing the banks’ practices. JPMorgan doesn’t report how much of the $433 billion managed by the private bank is subject to fiduciary requirements.
OCC Warning
In 2012, a review of JPMorgan by the OCC, which wasn’t made public, warned the bank that its cross-selling practices for pension funds violated the clients-first requirement, a person familiar with the matter has said. JPMorgan declined to comment on the warning.
U.S. securities regulators have also examined the cross-selling activities of JPMorgan’s asset-management business. They found that the bank had violated securities regulations by failing to tell investors that it favored its own products over others. To resolve the matter, in December 2015 the bank paid a record $307 million asset-management settlement to the SEC and the Commodity Futures Trading Commission. The bank admitted disclosure lapses and agreed to provide more transparency.
The next month, JPMorgan’s private bank settled regulatory claims that it had misled clients by telling them it paid advisers “based on clients’ performance” when, in fact, it considered other factors. The bank didn’t admit or deny wrongdoing.
Fine Print
Disclosure goes only so far, said Philip Aidikoff, a securities lawyer in Beverly Hills, California, who’s representing a client in an arbitration against JPMorgan over an alleged breach of fiduciary duty, the details of which aren’t public. “Clients shouldn’t have to worry that their bank can screw them because somewhere in a large offering document it says the bank can screw them,” he said.
A Labor Department rule set to take effect in April would require all advisers who recommend investments for retirement accounts to act as fiduciaries. Trump adviser Anthony Scaramucci has criticized the rule, leading to speculation that the new administration will either delay it or permanently roll it back.
To contact the reporter on this story: Neil Weinberg in New York at [email protected] To contact the editors responsible for this story: Sara Forden at [email protected] David S. Joachim, Jeffrey D Grocott