According to a recent Wall Street Journal article, J.P. Morgan Chase & Co. is under investigation by the Commodities Future Trading Commission over their practice of steering their clients into investing in a hedge fund that the bank owns. From 2007 to 2012, the percentage of dollars invested by the bank’s clients in the bank-owned hedge fund went from 26% to 71%, which raised a red flag for regulators. The possibility of lack of proper disclosures and complaints from customers that they were pressured into putting money into the fund that has not had good returns has also sparked the interest of regulators.
Banks and other financial firms are allowed to sell their products to their existing customers. Indeed many people prefer to have all their investments handled in one place. This is a perfect legal and legitimate practice. However, advisors are not allowed to put the interests of the bank and their own interests over the interests of their customers. Financial firms are required to make certain disclosures about the products and are only supposed to recommend products in the clients’ best interest.
There is a large and evolving area of the law dedicated to making sure people’s hard-earned money is being put to their best use instead of the best use of the advisor or financial institution. While most financial advisors are honest people making an honest living, there are some who skirt the ethical rules about what is in the best interest of their clients. Our firm has handled numerous cases over the years involving life insurance churning. “Churning” is when an investment advisor takes a person out of one policy that has built up cash value and puts them in another policy. The reason they sometimes do this is because the broker makes more commission selling a new product to a customer. The problem is that it ends up costing the customer substantial amounts of hard-earned money. Continue reading