JPMS and its affiliates earn compensation in various ways that you should be aware of so you can better evaluate the recommendations you receive from your advisor and JPMS. Depending on the type of account and transaction, JPMS will earn revenue from our clients, our affiliates and, for some products and services, third parties, including product vendors, underwriters and investment managers whose products and services are purchased by clients. JPMS also receives compensation as a result of certain intercompany profit-sharing and servicing agreements.
In a brokerage account, you generally compensate JPMS and your advisor through costs incurred with each transaction. This differs from an investment advisory account relationship in which the compensation is fee-based, not transaction-based, meaning the client pays a set fee or a fee based on the percentage of assets in the account in an advisory program. Miscellaneous account and administrative charges, as noted earlier, will also be charged to your account.
Advisor Compensation
Compensation to JPMS and Affiliates
Conflict of Interest and Other Disclosures
We design our compensation program to encompass best practices, support our business objectives and enhance shareholder value. J.P. Morgan’s compensation system plays a significant role in our ability to attract, retain and motivate the highest quality workforce. The compensation components described below do, however, create various incentives for advisors, including an incentive to recommend certain products and services, solicit business and bring assets to the firm at various times. J.P. Morgan policies and procedures exist to mitigate these conflicts of interest, where possible.
Brokerage Relationships Generate Transaction-Based Fees
Your advisor may only recommend or refer you to investments and products that are offered for sale by JPMS or through the JPMS platform. JPMS and its advisors recommend, sell and service investment products and services and are compensated on such products generally through the commissions, fees and expenses paid on the products and services that are sold. Fees vary by product, service and transaction size, so JPMS and its advisors may receive more for selling one product or service than another. As such, a conflict of interest exists based on the specific advice that you receive concerning the type of transactions, including the nature, timing and frequency of the advice that you receive. These transaction-based fees are in connection with, for example, the buying and selling of stocks, bonds, mutual funds, annuity contracts and other investment products, as well as trading and exercising options. These include commissions, transaction fees, loads and sales charges or other expenses that are embedded in the purchase price as well as compensation from third parties in some cases, all as further described below.
Cash Compensation
In general, we pay our advisors monthly cash compensation consisting of two components: (1) a guaranteed monthly minimum salary and (2) an incentive payout if it exceeds the monthly minimum salary. The incentive payout is a percentage (called a grid rate) of the product-related revenue (called revenue credit) that each advisor generates during that month with respect to the clients he or she serves. The grid rate is based on monthly revenue levels and generally ranges from 22% to 35%. Revenue reported must be greater than or equal to the fee schedule minimum in order for a trade to qualify for payment.
Advisors may be eligible to receive a non-cumulative draw, essentially an advance, against their incentive compensation under the plan. The amount and term of the draw is determined at the sole discretion of Executive Management.
Advisors do not provide investment advice and do not receive revenue credit with respect to transactions in You Invest accounts.
Special Compensation Awards
Advisors are also eligible to receive a net new money award based on net new money (NNM) generated from new clients and based on new money from existing clients as a result of deepening those relationships.
In order to be eligible for the award, an advisor must meet a minimum threshold in total NNM in the annual award measurement period and be actively employed at the time of payout. The new money needs to be invested into an eligible investment product to receive the award. The award is a percent of NNM, and averages between 0.11% and 0.175% of on NNM annually. On average, the award makes up about 5% of overall advisor compensation.
NNM Eligible Products
The award includes NNM credit for referrals to the You Invest platform if the client was referred and the account was funded with at least $25,000 NNM by year end.
Non-Cash Compensation
Advisors may receive certain non-cash compensation under limited circumstances. J.P. Morgan has implemented policies and procedures intended to ensure that its employees avoid actual or perceived conflicts of interest when giving or receiving non-monetary compensation from relevant parties, and to comply with all applicable laws and regulations. To that end, J.P. Morgan’s policies generally prohibit acceptance of any gifts, entertainment or other non-monetary compensation in connection with the services we provide to any particular client or in return for any business of the firm. Exceptions may be made for certain nominal non-cash gifts to J.P. Morgan employees of less than $100 meeting certain criteria, including potentially from third-party investment managers. Meals, refreshments and entertainment in the course of a host-attended business-related meeting or other occasion may also be permitted in limited circumstances. Travel or accommodation expenses are prohibited. The firm’s policies set conditions for each of these types of payments and do not permit any gifts or entertainment unless it is clear that the gift-giving person is not trying to influence or reward the employee inappropriately in connection with any business decision or transaction, and the gift is unsolicited.
In addition, certain representatives who demonstrate exceptional performance during the year may also be eligible to earn an annual trip through the National Achiever’s Conference.
Other Non-Cash Compensation and Subsidies
Third-party providers (such as fund companies) may participate in JPMS-sponsored internal training and education conferences and meetings, seminars and sales meetings and may make payments to, or for the benefit of, JPMS or its advisors to reimburse for certain expenses incurred for these events. Providers may also sponsor their own educational conferences or due diligence meetings and only pay for expenses while onsite for the event of advisors attending these events. JPMS’s policies require that the training or educational portion of these conferences comprise substantially all of the event and such conferences and meetings are subject to review and approval.
Further, JPMS may provide sponsorship opportunities and access to our branch offices and advisors to such providers for educational, marketing and other promotional efforts. Any payments made by providers could potentially lead advisors to focus on products managed by these providers when recommending products to clients instead of those from other providers that do not commit similar resources to educational, marketing and other promotional efforts. As a general matter, clients should be aware that the receipt of economic benefits from others, in and of itself, creates a potential conflict of interest.
Compensation to National Branch Financial Consultants
National Branch Financial Consultants receive an annual base salary and are eligible to receive an annual discretionary incentive compensation award. Base salaries are determined primarily on the basis of the individual’s job, i.e., his/her meritorious performance.
Recruitment Incentives
JPMS does not offer advisors located in Chase branches any hiring or recruitment incentives to join the firm.
Banker Investment Referral Credit
Certain bank employees are compensated when they refer clients to JPMS. Licensed Bankers who have identified an investment referral opportunity and have been instrumental in the client’s decision to meet with an advisor or invest through You Invest may receive referral compensation. A licensed investment referred transaction occurs when a referral from the licensed banker to an advisor results in an eligible investment (fixed annuities, variable annuities, mutual funds, investment advisory accounts and 529 plans). Licensed Banker compensation is in the form of a referral credit which is based on the dollar amount ultimately invested in eligible products.
Unlicensed bankers can also earn a one-time flat credit based on each referral that results in a completed appointment attended by the potential client and an advisor.
Such payments to Bank employees do not affect the cost to a client.
JPMS is compensated from various sources, as described in the section about Brokerage Products and more fully below, in addition to the account fees and transactions costs.
Purchasing J.P. Morgan Affiliated Funds and ETFs and Related Compensation
JPMS and its affiliates provide a wide range of financial services to various mutual fund companies. Some of these affiliates provide investment management and other services to J.P. Morgan Funds or ETFs, for which those affiliates will benefit from that purchase as a result of receiving investment management fees and other forms of compensation in connection with the operation of such funds, such as shareholding servicing, custody, fund accounting, administration, distribution, securities lending and other services. Therefore, because JPMS and its affiliates will in the aggregate receive more compensation if you purchase shares in a J.P. Morgan Fund or ETF than if you were to purchase shares in a non-affiliated mutual fund, there is a conflict of interest when JPMS clients purchase J.P. Morgan Funds. The prospectus, descriptive brochure, offering memorandum or similar documents for such products describe these fees and other compensation in detail.
Compensation for Other Services
J.P. Morgan or JPMS-related persons provide financial, consulting, investment banking, advisory, brokerage (including prime brokerage) and other services to, and receive customary compensation from, an issuer of equity and debt securities that may be held by client accounts. Such compensation could include financial advisory fees, monitoring fees, adviser fees or fees in connection with restructurings or mergers and acquisitions, as well as underwriting or placement fees, financing or commitment fees, trustee fees and brokerage fees.
To compensate JPMS for the placement and other services (including structuring, administration, investor relations, reporting and other similar or related services) provided by JPMS or any of its affiliates in respect of hedge funds, private equity funds and other alternative funds on the JPMS platform, the fund manager (or an affiliate) generally pays JPMS fees equal to a percentage of the aggregate amount of subscriptions accepted from investors introduced by JPMS. Such fees are paid out of the assets of the fund manager (or other affiliate) and not from the fund’s assets. There is, therefore, a potential conflict of interest in the form of an additional financial incentive to JPMS for making available to clients on the JPMS platform funds whose affiliates pay JPMS such fees. In certain circumstances, a portion of these fees may be passed on as compensation to certain advisors.
Bank Sweep Program
JPMS offers clients a bank deposit sweep program option where uninvested cash from investment accounts is swept into FDIC insured deposit accounts opened with JPMCB by JPMS. JPMCB benefits from deposits and credits to your JPMS account(s) that are swept into the Bank Sweep Program. JPMCB makes money on those sweeps. The profitability on such lending activities and investments is generally measured by the difference, or “spread,” between the interest rate paid on the deposits and other costs associated with the Chase Deposit Sweep, and the interest rate or other income earned by JPMCB on loans and investments made with the deposits. Therefore, JPMS and JPMCB have a financial incentive in the use of the Chase Deposit Sweep as the primary sweep option. Advisors are not compensated on the assets in the sweep programs.
Float Earnings
JPMCB or an affiliate may retain, as compensation for the performance of services, your account’s proportionate share of any interest earned on aggregate cash balances held by JPMCB or an affiliate with respect to “assets awaiting investment or other processing.” These “assets awaiting investment or other processing” are invested by JPMCB in a number of short-term and long-term investment products and strategies, including without limitation loans to clients and investment securities. The amount of earnings retained by JPMCB on such assets, known as “float,” due to their short-term nature, is generally considered to be at the prevailing Federal Funds interest rate (a publicly available average rate of all Federal Funds transactions entered into by traders in the Federal Funds market on a given date), less FDIC insurance and other associated costs, if any. “Assets awaiting investment or other processing” for these purposes includes, to the degree applicable, new deposits to the account, including interest and dividends, as well as any uninvested assets held in the account caused by an instruction to purchase and sell securities. JPMCB or an affiliate will generally earn float until such time as such funds may be automatically swept into a sweep vehicle or otherwise reinvested. “Assets awaiting investment or other processing” may also arise when JPMCB facilitates a distribution from your account. Pursuant to JPMCB’s standard processes for check disbursement, cash is generally debited from the account on the date on the face of the check (also called the payable date). Such cash is deposited in a non-interest-bearing omnibus deposit account at JPMCB, where it remains until he earlier of the date the check is presented for payment or the date payment on the check is stopped at your instruction (in which case the underlying funds are returned to the account). JPMCB derives earnings (float) from use of funds that may be held in this manner, as described above.
Principal Trading and Agency Cross Transactions Compensation
When permitted by applicable law, JPMS may sell securities to you and buy securities from you through our own account as principal and act as agent for you and another client in the same trade without first obtaining your consent. The trading capacity is disclosed to you on the trade confirmation. When we or an affiliate act as principal in buying a security from or selling a security to a client, we earn compensation on the transaction by marking up the price of the security sold to the client and marking down the amount received by the client when selling a security to us. This spread is the firm’s compensation for taking market risk and making a market in the security.
We have adopted policies and procedures that govern transactions for our principal accounts and the accounts of our employees. These policies and procedures are designed to prevent, among other things, improper or abusive conduct when there is a potential conflict with interests of clients.
JPMS also has the authority to effect “agency cross” transactions (i.e., transactions for which JPMS or one of its affiliates acts as a broker for both the account and the counterparty to the transaction) when permitted by applicable law. JPMS or its affiliates may receive compensation from each party to the transaction, and for that reason, we will have a potentially conflicting division of loyalties and responsibilities regarding the parties to the transaction.
Order Flow, ECNs, Trading System Payments
JPMS may receive payment for order flow in the form of discounts, rebates, reductions of fees or credits. This does not alter JPMS’s policy to route client orders to the market where it believes clients will receive the best execution, taking into account price, reliability, market depth, quality of service, speed and efficiency.
In addition, JPMS may effect trades on behalf of your account(s) through exchanges, electronic communications networks, alternative trading systems and similar execution systems and trading venues (collectively, “Trading Systems”), including Trading Systems in which J.P. Morgan may have a direct or indirect ownership interest. J.P. Morgan may receive indirect proportionate compensation based upon its ownership percentage in relation to the transaction fees charged by such Trading Systems in which it has an ownership interest. Please contact your advisor to request an up-to-date list of all Trading Systems through which we might trade. Such Trading Systems (and the extent of our ownership interest in any Trading System) may change from time to time.
A conflict of interest can be defined as an interest that might incline a broker-dealer or its advisors to consciously or unconsciously make a recommendation that is not disinterested. J.P. Morgan has adopted policies and procedures reasonably designed to appropriately prevent, limit or mitigate conflicts of interest that may arise between JPMS, its advisors and its affiliates. These policies and procedures include information barriers designed to prevent the flow of information between JPMS and certain other affiliates. Certain actual or potential conflicts of interest are described below, while others are described throughout this booklet including, in particular, those relating to fees and other compensation earned by advisors, JPMS and its affiliates when transacting in a brokerage account.
J.P. Morgan Acting in Multiple Commercial Capacities
J.P. Morgan is a diversified financial services firm that provides a broad range of services and products to its clients and is a major participant in the global currency, equity, commodity, fixed income and other markets in which JPMS Client Accounts invest. J.P. Morgan is typically entitled to compensation in connection with these activities. In providing services and products to clients other than JPMS’s clients, J.P. Morgan, from time to time, faces conflicts of interest with respect to activities recommended to, or performed for, JPMS clients on one hand and for J.P. Morgan’s other clients on the other hand. J.P. Morgan also advises and represents potential buyers and sellers of businesses worldwide. JPMS client accounts have invested in, and in the future may invest in, such entities represented by J.P. Morgan or with which J.P. Morgan has a banking, advisory or other financial relationship. In addition, certain clients of J.P. Morgan, including JPMS clients, invest in entities in which J.P. Morgan holds an interest, or with respect to which J.P. Morgan provides services, including a J.P. Morgan Fund or J.P. Morgan ETF. In providing services to its clients and as a participant in global markets, J.P. Morgan, from time to time, recommends or engages in activities that compete with or may otherwise adversely affect a JPMS client account or its investments. It should be recognized that such relationships can preclude JPMS’s clients from engaging in certain transactions and can also restrict investment opportunities that would otherwise be available to JPMS clients. J.P. Morgan is often engaged by companies as a financial adviser, or to provide financing or other services in connection with commercial transactions that are potential investment opportunities for JPMS’s clients. J.P. Morgan reserves the right to act for these companies notwithstanding the potential adverse effect on JPMS’s clients. J.P. Morgan derives ancillary benefits from providing investment advice, custody, administration, prime brokerage, transfer agency, fund accounting and shareholder servicing and other services to JPMS’s clients. Providing such services to JPMS’s clients enhances J.P. Morgan’s relationships with various parties, facilitate additional business development and enables J.P. Morgan to obtain additional business and generate additional revenue.
J.P. Morgan’s Proprietary Investments
JPMS, J.P. Morgan and any of their directors, partners, officers, agents or employees also buy, sell or trade securities for their own accounts or for the proprietary accounts of JPMS and/or J.P. Morgan. JPMS and/or J.P. Morgan, within their discretion, can make different investment decisions and take other actions with respect to their proprietary accounts than those made for client accounts, including the timing or nature of such investment decisions or actions. Furthermore, JPMS is not required to purchase or sell for any client account securities that it, J.P. Morgan, and any of their employees, principals or agents may purchase or sell for their own accounts or the proprietary accounts of JPMS or J.P. Morgan. JPMS, J.P. Morgan and their respective directors, officers and employees face a conflict of interest as they will have income or other incentives to favor their own accounts or the proprietary accounts of JPMS or J.P. Morgan.
Investing in Securities in which JPMS or a Related Person Has a Material Financial Interest
JPMS and its related persons may recommend or invest in securities on behalf of its clients that JPMS and its related persons may also purchase or sell. As a result, positions taken by JPMS and its related persons will be the same as or different from, or be made contemporaneously with or at different times than, positions taken for clients of JPMS. As these situations involve actual or potential conflicts of interest, JPMS has adopted policies and procedures relating to personal securities transactions, insider trading and other ethical considerations. These policies and procedures are intended to identify and mitigate actual and perceived conflicts of interest with clients and to resolve such conflicts appropriately if they do occur. The policies and procedures contain provisions regarding pre-clearance of employee trading, reporting requirements and supervisory procedures that are designed to address potential conflicts of interest with respect to the activities and relationships of related persons that might interfere or appear to interfere with making decisions in the best interest of clients, including the prevention of front-running. In addition, JPMS has implemented monitoring systems designed to ensure compliance with these policies and procedures.
Other Financial Services Provided by JPMS and its Affiliates
In addition to the services provided by JPMS to its brokerage clients, JPMS and its affiliates provide other financial services to individuals, corporations and municipalities. Those companies provide a wide variety of financial services to each other and third parties to facilitate servicing clients. These services may include, but are not limited to, banking and lending services, sponsorship of deferred compensation and retirement plans, investment banking, securities research, institutional trading services, investment advisory services and executing portfolio securities transaction for funds and other clients. JPMS and its affiliates receive compensation for these services.
Transfer of Assets to JPMS
When you transfer assets from another firm to JPMS, including a rollover of assets from retirement plans or other accounts, we earn compensation on the assets; please note, we will not earn this compensation if the assets are not transferred to JPMS. We may also earn more, and your advisor will begin to earn compensation, if your assets are transferred from a You Invest account and placed in a JPMS investment advisory account or a full-service brokerage account, or are used to purchase an annuity through us. Advisors are not currently compensated on You Invest accounts. Thus, you should be aware that we do have an economic interest in you transferring or rolling over your assets to JPMS.
Allocation
Potential conflicts of interest may arise in the process of allocating securities to full-service brokerage accounts for the purchase of securities that are distributed through syndicate transactions, particularly with regard to some equity IPO securities. JPMS may have an incentive to allocate syndicate securities to certain accounts or clients, particularly in cases where the client demand for the syndicate offering exceeds the supply. For example, JPMS has an incentive to allocate to one account over another account because it may receive more revenue from one account than it does from a similar account. This could incentivize JPMS to allocate opportunities of limited availability to the account that generates more revenue for JPMS.
JPMS has established policies, procedures and practices to manage the conflict described above. JPMS’s syndicate allocation practices are designed such that syndicate allocation decisions are made following established procedures that require consideration of multiple factors and are designed to comply with securities laws and other applicable regulations. Syndicate allocation decisions that may give rise to material actual, potential or perceived conflicts of interest will be identified and escalated for review and resolution.
Non-U.S. Investments
International investing involves a greater degree of risk and increased volatility. Changes in currency exchange rates and differences in accounting and taxation policies outside the U.S. can raise or lower returns. Also, the volatility of some non-U.S. markets may be higher due to instability associated with their political and economic environments.
Non-Traditional Mutual Funds and ETPs
information regarding non-traditional mutual funds and ETPs, please speak with your advisor or review “Investing in Non-Traditional Funds” at www.chase.com/content/dam/chase-ux/documents/personal/investments/investing-in-non-traditional-funds.pdf.
Ownership Interest in J.P. Morgan Stock
Certain asset management firms (each, an “asset manager”) through their funds and separately managed accounts currently hold a 5% or more ownership interest in J.P. Morgan publicly traded stock. This ownership interest presents a conflict of interest when JPMCB, JPMS and J.P. Morgan recommends or purchases the publicly traded security of the asset manager or the separately managed accounts or funds that are managed or advised by the asset manager. J.P. Morgan addresses this conflict by disclosing the ownership interest of the asset manager and by subjecting the asset manager’s separately managed accounts and funds to a research process. Additionally, the advisors and portfolio managers that may purchase or recommend securities, separately managed accounts and funds of an asset manager that has an ownership interest in J.P. Morgan, do not receive any additional compensation for that purchase or recommendation. A fund ownership interest in J.P. Morgan can cause the fund and its affiliates to determine that they are unable to pursue a transaction or the transaction will be limited or the timing altered. J.P. Morgan monitors ownership interests in J.P. Morgan for regulatory purposes and to identify and mitigate actual and perceived conflicts of interest. As of December 31, 2019, both Vanguard and BlackRock hold more than a 5% interest in J.P. Morgan.
J.P. Morgan offers a DAF through collaboration with National Philanthropic Trust (NPT) with approximately $6B in AUM called the J.P. Morgan Donor Advised Fund, which has approximately $32M AUM.
NPT serves as the sponsoring public charity for the DAF accounts and is the third-largest such DAF sponsor in the United States. J.P. Morgan is currently about 40% of NPT’s book of business.
Through NPT, J.P. Morgan offerings accept complex and illiquid assets, offer a larger variety of investment options and have international grant-making capabilities, giving clients greater flexibility, enhanced options and fewer restrictions than competitors.