‘Guided Architecture’
For at least a few years, an approach to steer clients toward funds that are lucrative to the bank has been referred to internally as “guided architecture,” according to a former employee who worked with retirement plans.
The SEC is looking into whether JPMorgan’s practices breached the bank’s duty to clients, these people said. The regulators also are asking whether the bank’s communications with clients over the years adequately disclosed its compensation and other practices, the people said.
JPMorgan, in a 2015 disclosure statement for endowment and foundation clients, said it rigorously reviews internal and external investment options but prefers in-house products unless it believes others can give a portfolio substantial benefits not offered by its own funds.
“We prefer internally managed strategies because they generally align well with our forward-looking views and our familiarity with the investment process, as well as the risk and compliance philosophy that comes from being part of the same firm,” the statement said. “It is important to note that J.P. Morgan receives more overall fees when internally managed strategies are included.”
All in One
Regulators are also interested in the bank’s use of its own funds inside products it has marketed to retail investors, including an all-in-one investment called the Chase Strategic Portfolio, said the people familiar with the matter.
The SEC has said it is broadly targeting conflicts of interest in the asset-management business.
“We expect to recommend a number of conflicts cases for enforcement action,” said the co-chief of the SEC Enforcement division’s asset management unit, Julie Riewe. These, she said in a February speech, include “undisclosed bias toward proprietary products and investments.”
JPMorgan’s asset-management unit has faced criticism in recent years, including by advisors who alleged they were pressured to sell in-house products even when it wasn’t in their clients’ best interests.