What's Wrong With Earning a Commission From the Sale of a Financial Product?
What's wrong with earning a commission from the sale of a financial product? Nothing. It isn’t any more inappropriate than a car salesperson earning a commission when you buy a vehicle.
Yet there's one important difference. When you buy a car the roles are clear. You know going in that the salesperson is there to sell you their product. You understand it’s your responsibility to do your homework and know what you need and can afford.
That clarity of roles is purposely clouded in the financial services industry. The "salespeople" are rarely referred to as such. Instead they call themselves creatively contrived variations like "financial advisor," "financial planner," "financial consultant," or "financial representative." The only advice a financial salesperson gives is in conjunction with the sales pitch to buy their product, where the incentive for them is receiving a commission.
This pretense that salespeople are working for the customer rather than the financial firm that employs them creates an inherent conflict of interest. The salesperson's financial rewards come from pushing products versus giving client-oriented, comprehensive financial advice.
The conflict of interest resulted in many brokerage and insurance firms in the 1980’s providing incentives for their salespeople to push high commission products while hiding the high fees. Just one of many examples was described in a 1993 article in the Los Angeles Times. Prudential allowed salespeople to cheat customers out of $3 billion of losses invested into 700 Prudential limited partnerships that were high-risk and "rife with misconduct" while telling investors they were "safe, high-yield investments comparable to bank certificates of deposit." The company finally agreed to a fine of $371 million, representing about 12% of what investors lost.
You might think that, 24 years later, things have changed and large financial firms selling products have changed. They haven't. One recent example was the $185 million fine paid by Wells Fargo over charging their customers fees for financial products they didn’t authorize.
Also, two years ago JPMorgan was fined $307 million for product pushing. Last year they were fined $264 million for their part in a vast foreign bribery scheme.
In 2015, one of the top JPMorgan representatives, Johnny Burris, who has been in the business for more than 25 years, refused to steer clients into proprietary JPMorgan funds that he felt had become rife with high fees. As reported in Financial Planning magazine, he was let go by the company.
But wait, that’s not all. If you think Wells Fargo and JPMorgan’s fines were notable, think again. According to the Columbus Dispatch, Bank of America has paid $76.6 billion in 31 settlements from 2009 to 2016. During the same period, Chase Bank paid $38 billion in 22 settlements and Citigroup paid $15.8 billion in 15 settlement cases.
With a track record like this, you might think that consumers would be demanding wholesale changes in the way we regulate financial advice. They probably would be if they were personally aware of how hidden costs and fees cost the average investor thousands of dollars a year. No wonder that big financial firms can afford to pay billions in fines as a cost of doing business.
Other countries, including Australia, Canada, and the UK, have required a distinct separation of financial advice from financial sales. Hopefully the US won't let another 24 years go by with no changes in the way we regulate companies that sell financial products. For those changes to be driven by consumer demand, more investors need to learn about the costs they pay and to realize that sellers of financial products are not that different from sellers of cars.
Top Picks in Asset Allocation
Written b: John Bilton, Head of Global Multi-Asset Strategy, Multi-Asset Solutions
As global growth broadens out and the reflation theme gains traction, the outlook brightens for risky assets
Four times a year, our Multi-Asset Solutions team holds a two-day-long Strategy Summit where senior portfolio managers and strategists discuss the economic and market outlook. After a rigorous examination of a wide range of quantitative and qualitative measures and some spirited debate, the team establishes key themes and determines its current views on asset allocation. Those views will be reflected across multi-asset portfolios managed by the team.
From our most recent summit, held in early March, here are key themes and their macro and asset class implications:
Key themes and their implications
Asset allocation views
For the first time in seven years, we see growing evidence that we may get a more familiar end to this business cycle. After feeling our way through a brave new world of negative rates and “lower for longer,” we’re dusting off the late-cycle playbook and familiarizing ourselves once again with the old normal. That is not to say that we see an imminent lurch toward the tail end of the cycle and the inevitable events that follow. Crucially, with growth broadening out and policy tightening only glacially, we see a gradual transition to late cycle and a steady rise in yields that, recent price action suggests, should not scare the horses in the equity markets.
If it all sounds a bit too Goldilocks, it’s worth reflecting that, in the end, this is what policymakers are paid to deliver. While there are persistent event risks in Europe and the policies of the Trump administration remain rather fluid, the underlying pace of economic growth is reassuring and the trajectory of U.S. rate hikes is relatively accommodative by any reasonable measure. So even if stock markets, which have performed robustly so far this year, are perhaps due a pause, our conviction is firming that risk asset markets can continue to deliver throughout 2017.
Economic data so far this year have surprised to the upside in both their level and their breadth. Forward-looking indicators suggest that this period of trend-like global growth can persist through 2017, and risks are more skewed to the upside. The U.S. economy’s mid-cycle phase will likely morph toward late cycle during the year, but there are few signs yet of the late-cycle exuberance that tends to precede a recession. This is keeping the Federal Reserve (Fed) rather restrained, and with three rate hikes on the cards for this year and three more in 2018, it remains plausible that this cycle could set records for its length.
Our asset allocation reflects a growing confidence that economic momentum will broaden out further over the year. We increase conviction in our equity overweight (OW), and while equities may be due a period of consolidation, we see stock markets performing well over 2017. We remain OW U.S. and emerging market equity, and increase our OW to Japanese stocks, which have attractive earnings momentum; we also upgrade Asia Pacific ex-Japan equity to OW given the better data from China. European equity, while cheap, is exposed to risks around the French election, so for now we keep our neutral stance. UK stocks are our sole underweight (UW), as we expect support from the weak pound to be increasingly dominated by the economic challenges of Brexit. On balance, diversification broadly across regions is our favored way to reflect an equity OW in today’s more upbeat global environment.
With Fed hikes on the horizon, we are hardening our UW stance on duration, but, to be clear, we think that fears of a sharp rise in yields are wide of the mark. Instead, a grind higher in global yields, roughly in line with forwards, reasonably reflects the gradually shifting policy environment. In these circumstances, we expect credit to outperform duration, and although high valuations across credit markets are prompting a greater tone of caution, we maintain our OW to credit.
For the U.S. dollar, the offsetting forces of rising U.S. rates and better global growth probably leave the greenback range-bound. Event risks in Europe could see the dollar rise modestly in the short term, but repeating the sharp and broad-based rally of 2014-15 looks unlikely. A more stable dollar and trend-like global growth create a benign backdrop for emerging markets and commodities alike, leading us to close our EM debt UW and maintain a neutral on the commodity complex.
Our portfolio reflects a world of better growth that is progressing toward later cycle. The biggest threats to this would be a sharp rise in the dollar or a political crisis in Europe, while a further increase in corporate confidence or bigger-than-expected fiscal stimulus are upside risks. As we move toward a more “normal” late-cycle phase than we dared hope for a year back, fears over excessive policy tightening snuffing out the cycle will grow. But after several years of coaxing the economy back to health, the Fed, in its current form, will be nothing if not measured..
Learn how to effectively allocate your client’s portfolio here.
This document is a general communication being provided for informational purposes only. It is educational in nature and not designed to be a recommendation for any specific investment product, strategy, plan feature or other purpose. Any examples used are generic, hypothetical and for illustration purposes only. Prior to making any investment or financial decisions, an investor should seek individualized advice from a personal financial, legal, tax and other professional advisors that take into account all of the particular facts and circumstances of an investor’s own situation.
J.P. Morgan Asset Management is the marketing name for the asset management business of JPMorgan Chase & Co and its affiliates worldwide. Copyright 2017 JPMorgan Chase & Co. All rights reserved.
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