JP Morgan Steals from Church

Christ Church Cathedral was built in 1857. It is the oldest building on downtown Indianapolis’s Monument Circle.

It’s also pretty wealthy as far as churches go. That’s because pharmaceutical giant Eli Lilly donated a substantial sum to the Christ Church through the Lilly Endowment, which was founded in 1937.

You see, the Christ Church in Indianapolis was the Lilly family church. Eli sang in the choir as a boy. He served as a vestryman. In 1957, he wrote the church’s history in History of the Little Church on the Circle.

When Eli Lilly died in 1977, he left the Christ Church of Indianapolis a significant sum from the Lilly Endowment. Mr. Lilly had specified that he wanted the trust money divided into three trusts and the funds managed by three different local banks.

As Bloomberg points out, this bequest was made before the Glass-Steagall Act was repealed in 1999. The Act made it illegal for commercial banks to also act as investment banks or securities brokers.

But when that Act was repealed, the big Wall Street investment banks went on an acquisition rampage, snapping up local banks to boost their deposit bases and acquire more trading capital.

That is how JP Morgan came to be the trustee of two of the Christ Church’s trust funds in 2004.

Bloomberg reports that in 2006, the Christ Church investment committee asked JP Morgan to hire independent money managers to handle the trusts. JP Morgan said no.

That should have been a big red flag right there. But Christ Church stuck with JP Morgan…

Let the Games Begin

Starting in 2007, JP Morgan threw up another red flag when it announced it would start putting the Church’s funds in alternative investments and hedge funds.

It spread the cash out among 180 different investment products, 90 of which were “structured notes” — derivatives on stock indexes and currencies.

Fees on these notes ran as high as 11%, and Christ Church average 1.4% annual gains until 2013.

JP Morgan also chose products created by — guess who — JP Morgan. One cited by Bloomberg was the JPMorgan Blackstone Partners Offshore Fund Ltd., “a ‘fund of fund of funds’ with three layers of fees that together may have exceeded 8%.”

Another was JP Morgan’s hedge fund, Highbridge Dynamic Commodities Fund. This fund opened in 2010, had no performance history, and Morningstar gave it its lowest rating. And yet JP Morgan trust managers deemed it appropriate for the Church’s money.

No surprise, JP Morgan’s Highbridge fund reached its peak asset level the very next year, at $2.7 billion, as it funneled its own client money into Highbridge.

The fund lost 17% before it was killed in January of 2014.

JP Morgan resigned as Christ Church’s trust manager in 2013. The Church’s $34 million had fallen in value to $31 million (even though the Church did take 5% to 6% annual distributions, which is what a trust fund is supposed to do).

During the time Christ Church was with JP Morgan, the S&P 500 gained 64%. A Bank of America bond index gained 55%.

JP Morgan’s annual management fees nearly quadrupled, and the Church claims JP Morgan’s mismanagement cost the trust $13 million in other fees and losses.

In 2013, when the Christ Church filed suit against JP Morgan, between 68% and 85% of the trust was in investments that JP Morgan either owned or had an interest in. And as it turns out, JP Morgan’s own investment funds aren’t so great.

In 2013, Morningstar-rated JP Morgan mutual funds ranked in the 47th percentile for performance. And JP Morgan’s mutual fund fees were 24% higher than average.

That same year, JP Morgan managed $2.3 trillion in client money in its Asset Management division.

It’s Theft, Plan and Simple

It shouldn’t be a surprise. This is how Wall Street operates. They draw in clients by presenting themselves as professionals, and then they start sucking exorbitant fees from the clients’ money.

Here’s an excerpt from JP Morgan’s disclosure to its clients:

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… J.P. Morgan Chase receives more overall fees when internally managed strategies are included.

But who reads the fine print?

And maybe if they were really good — or even better than average – it would be OK. But they’re not. They are completely average — no better than you or me. 

Yes, this is my crusade: to convince you that you can do just as well, and probably better, investing your own money. Heck, Christ Church would have done much better just buying a low-fee S&P 500 ETF!

Investors are getting wise to this. Last year, U.S. mutual funds had $92 billion in net outflows, while passively managed index funds took in $156 billion. Basically, individual investors like you and me are telling Wall Street to pack sand. And we’re going to be better off for it.

In the wake of the financial crisis, which was in itself largely a result of Wall Street greed, Congress passed the Dodd-Frank Act, which sought to limit Wall Street banks’ ability to run hedge funds like Highbridge and engage in other risky investment behavior.

That Act is about to get gutted in Congress so investment banks can keep screwing investors over.

Wall Street also consistently fights new “fiduciary” rules tooth and nail. If these banks have to act as fiduciaries, it means they have to put client interests above their own.

Clearly, they don’t want to do this, because then they’d have to stop investing in their own products and charging outrageous fees.

For the New Year and beyond, don’t give Wall Street the chance to screw you over. Don’t let them touch your money.

Until next time,

Until next time,

Briton Ryle

@BritonRyle on Twitter

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A 21-year veteran of the newsletter business, Briton Ryle is the editor of The Wealth Advisory income stock newsletter, with a focus on top-quality dividend growth stocks and REITs. Briton also manages the Real Income Trader advisory service, where his readers take regular cash payouts using a low-risk covered call option strategy. He is also the managing editor of the Wealth Daily e-letter. To learn more about Briton, click here.