TheChek News Flow

At J.P. Morgan, $9 Million in Assets Isn’t Rich Enough

Firm’s private bank is doubling the minimum to $10 million in investible assets for clients

Clients of the firm’s private bank later this year will be required to have at least $10 million in investible assets, twice the current minimum of $5 million, said people familiar with the matter.

The move is one of the boldest yet among banks that are increasingly focused on managing the money of wealthy clients, who generate more fees and entail less risk than middle-class and lower-income customers. However, because wealthy clients typically require more attention, banks are being more discriminating when deciding who qualifies for such personalized service.

J.P. Morgan’s restructuring of the unit also reflects broader trends that are reshaping Wall Street, including banks’ ambivalence toward deposits in a period of low interest rates and their persistent efforts to cut costs.

J.P. Morgan’s private bank in recent months laid off more than 100 employees, including managing directors in New York, London, Washington and Boston, people familiar with the layoffs said.

The shift could affect about 10% of the private bank’s current clients, based on a J.P. Morgan presentation from February that showed roughly 90% of the private bank’s clients have more than $10 million in assets. Clients who don’t meet the $10 million threshold will be moved to a less hands-on service called Private Client Direct, people familiar with the changes said.

The private bank groups may support a few dozen clients, whereas Private Client Direct, which could have a group half the size, supports an average of roughly 100 clients, these people said.

A February bank presentation showed that about 50% of the unit’s clients have $100 million or more. The private bank managed $437 billion in assets as of the end of 2015.

As the name implies, private banks cater to an exclusive clientele, and many of them provide services closer to a concierge than a bank. Their main function is help clients manage their investments, including retirement planning and the buying of stocks, but private bankers often also assist with everything from snagging exclusive sporting event tickets to the purchase of art.

Private banks also typically let clients buy into certain alternative investments, like hedge funds, that are off-limits to ordinary bank customers.

The focus on wealthier clients “is a trend that we definitely see happening in this industry on the banking side,” said Ken Hoffman, president at wealth-management consultant Optima Group Inc.

Mr. Hoffman said other private banks are either raising their minimums or being more strict in enforcing them as a means of shedding all but the most valuable customers.

With wealth-management groups under increased pressure to maintain profitability, he said, “the only two solutions available are either to move to a much less customized program, which is highly reliant on technology, or increase the average account sizes.”

Large U.S. banks in recent years have been expanding wealth-management units, which don’t tie up as much capital on the balance sheet under new regulations designed to restrict riskier activities.

Wealthy clients also typically generate a steady stream of revenue because fees are based on a percentage of assets under management rather than transactions. A base wealth-management fee is typically an average of 0.60 percentage point of managed assets, with some banks charging as high as 0.75 point, said Donnie Ethier, associate director of research firm Cerulli Associates’ high-net-worth practice.

Additional services like trust, cash management and insurance often impose additional fees.

Revenue in J.P. Morgan’s private bank has increased nine of the past 10 years, hitting $5.8 billion in 2015, according to filings. But the firm’s asset-management businesses are coming under pressure.

J.P. Morgan Asset Management, which includes asset, investment and wealth management, generated $1.9 billion in operating profit in 2015, down 10% from 2014.

While banks once prized large deposits, they are shunning them because low interest rates make it difficult for firms to lend that money profitably.

Meanwhile, at the bottom end of the market, robo advisers are proliferating and driving fees lower across the industry.

These moves are part of initiatives brought by Kelly Coffey, a longtime J.P. Morgan executive who was appointed CEO of the U.S. private bank in March 2015.

In addition to the layoffs that have already taken place, J.P. Morgan’s private bank late last year began putting more of its employees on performance-improvement plans, with the threat of layoffs for those who don’t meet certain goals, according to people familiar with the matter. The bank is hiring additional staff to beef up the Private Client Direct service for clients who fall short of the $10 million threshold.

Investors are pulling out as performance slips

An obscure Wall Street product popular in the easy-money years after the financial crisis is starting to show some cracks.

Investors who poured $22 billion into funds called “nontraded business development companies” are now pulling out record sums as the value of those investments flags, according to a review of public filings done for The Wall Street Journal.

The funds carry a number of unusual risks that haven’t provided much of a deterrent to investors reaching for yield amid record-low interest rates. They are built out of loans to small and medium-size companies with less than stellar credit, are less transparent than regular mutual funds, typically make investors pay upfront fees of at least 10% and only accept withdrawal requests once a quarter.

But the move to the exits is accelerating. Investors pulled $47.3 million out of nontraded BDC’s in the third quarter of 2015, up from $25.7 million in the second quarter, according to an analysis by Summit Real Estate Advisory Services.

Performance has been slipping, too. Across the industry, the value of the funds’ assets at the end of September was on average 16% lower than their initial offering price to investors, according to a separate analysis by investment-banking firm Robert A. Stanger & Co. Only one of the 13 nontraded BDCs tracked by Stanger has outperformed the Merrill Lynch U.S. High Yield bond index since its inception.

The performance figures, which go through the third quarter of 2015, are the most recent publicly available.

Nontraded BDCs were part of a fast-growing class of alternative, high-commission investments sold to individual investors in recent years. Marketing materials promised steady dividends, yields as high as 8% and a haven from volatile markets, according to fund documents and executives.

The fees, though, exceed those of most products pitched to retail investors. For example, one nontraded BDC said in its disclosures that its 10% sales load and likely 2% offering expenses mean only $88 of every $100 of shares bought “will actually be invested in us...you would have to experience a total return on your investment of between 14% and 18% in order to recover these expenses.”

A new rule going into effect next month from the Financial Industry Regulatory Authority, which oversees brokers, is designed to give investors a clearer picture of the impact of fees. At least one nontraded BDC has already cut its upfront commission in response.

Meanwhile, Wall Street continues to push the products. In its drive for growth, the industry’s trade association is lobbying in Washington. The largest provider, Philadelphia-based Franklin Square Capital Partners, recently threw a fundraiser for Democratic presidential candidate Hillary Clinton featuring Jon Bon Jovi, according to people in attendance. The firm has thrown similar events for Republican politicians, these people said.

Regulators are watching closely. Paul Mathews, Finra’s vice president for corporate financing, said the products are an “ongoing concern” for the regulator and that “firms must ensure they are suitable for an investor’s risk profile and investment strategy.”

Stanger said nonlisted BDCs raised $341 million in January and February, the most recent data available, down about 48% from about $660 million in the same two months of last year.

Supporters say BDCs play an increasingly important role in the economy by lending to businesses that otherwise couldn’t find funding.

Big financial firms such as Credit Suisse Group AG and KKR & Co. also have launched or supported such funds through partnerships.

Generally, the issuers say the funds are suffering from pressures affecting many investments: volatility in the markets, particularly for junk-rated debt.

The U.S. junk-bond market has returned 3.13% this year through Thursday following a 4.5% decline in 2015, its first loss since the financial crisis.

A spokesman for Credit Suisse declined to comment.

A spokesman for Franklin Square cited the “volatile market” in a statement, adding that the firm has been experiencing “solid net inflows into our funds and redemptions remain at a very low level.”

KKR, which backs Corporate Capital Trust, one of the larger nontraded BDCs, announced the launch of a second fund earlier this month. “Amid the current market volatility, we believe we will continue to see a broad set of investment opportunities in private U.S. companies,” the company said in a statement at the time.

Still, J. Mark Nickell, a financial adviser in Brentwood, Tenn., said he doesn’t ever advise clients to buy private funds. He said he is having a difficult time getting a client’s money out of a nontraded BDC the investor had bought earlier. “To me, there are just red flags all over the place,” he said.

Part of what concerns regulators is that nontraded BDCs are being sold using many of the same networks of brokerage firms and typically charging the same high upfront commissions as nontraded real-estate investment trusts. These REITs, after years of explosive growth, face mounting criticism from regulators and others for their perceived high costs, lack of transparency and poor performance.

“It’s kind of like weeds,” said William Galvin, the top Massachusetts securities regulator. “You whack them in one part of the garden, but they come up in another.”