Prey for Higher Returns: A Church's Shocking Story
Church vs. Adviser
In August 2014, the rector, wardens and vestrymen of Christ Church Cathedral of Indianapolis filed a federal lawsuit in Indiana. The defendants are JPMorgan Chase & Co. and JPMorgan Chase Bank N.A. (JPM).
The allegations in the complaint (which have not been adjudicated) are pretty shocking. It alleges that JPMorgan Chase Bank served as the sole trustee over the Christ Church trust accounts from July 2004 through December 2013. Between 2004 and 2007, the value of the trusts ranged from $35.4 million to $39.2 million. But, after about 7 and a half years of "management" by JPMorgan Chase, the value of the trust had decreased to $31.6 million as of December 2013.
The endowment at issue (called the Talbot Fund) originated with a significant gift to the church by the Eli Lilly family. A condition of the gift was that trust funds should be used to benefit the Episcopal Church and to enrich the spiritual life of Indianapolis.
Originally, three Indianapolis banks were designated by the Lilly family to serve as trustees. However, those banks no longer exist. JPMorgan Chase, through a series of mergers and consolidations, became the sole trustee tasked with the care, management, growth and preservation of the trusts.
Performance Compared to Index
To put the performance of the trusts managed by JPMorgan Chase into perspective, from July 2004 through December 2013, the total S&P 500 (^GSPC) return was 63.47 percent. The annualized return was 5.35 percent. If dividends were reinvested during this period, the total return would have been 97.99 percent, and the annualized return would have been 7.52 percent. If the trust assets had simply been invested in a low management fee S&P 500 index fund during this time, with dividends reinvested, they would have almost doubled in value.
What accounted for this allegedly dismal performance? According to the complaint, JPMorgan Chase used its position as trustee to purchase from itself a hodgepodge of private equity funds, structured notes, hedge funds and other proprietary funds. Allegedly, the percentage of proprietary products the bank bought from itself on behalf of the church ranged from 68 percent to 85 percent of the portfolio.
Fees Disclosed and Undisclosed
The complaint further alleges that JPMorgan Chase's conduct was calculated to increase fees to itself at the expense of the church. From 2004 through 2013, the annual disclosed fees increased from an average of $35,000 to $177,800, which does not seem unreasonable for managing a trust of this size. However, the church goes on to claim that the "affirmatively concealed revenues received by JPMorgan from the use of the trust funds is expected to be far greater and will render the disclosed fees to be insignificant in comparison."
Defendants have denied all the allegations in the complaint. They are seeking to have most of the claims dismissed, and a decision is pending.
JPMorgan Chase contends that between 2006 and 2013, the trust distributed more than $13 million to the church and that the trust still gained well more than $10 million during that period. The bank asserts the church ignores the fact that "the vast majority of investments ... produced solid -- and in some cases stellar -- returns for the trusts."
The Lilly Family's Fatal Mistake
One fact seems inescapable. The benefactor of the trust could have required that trust assets be invested in a globally diversified portfolio of low management fee index funds. Instead, the terms of the trust permitted the trustee to engage in active management, where the investment adviser attempts to "beat the market." By engaging in active management, the performance of the trust appears to have suffered the same fate as most individual investors: It significantly underperformed market returns available for the taking.
If you are pursuing the same flawed investing strategy, you might want to fundamentally change the way you invest. If the allegations in the complaint are proven true at trial, the church will be found to have been little more than "prey" for JPMorgan Chase's "predatory" attempt to generate higher returns for itself.
Messages left for the church's attorney and for the media relations department at JPMorgan Chase seeking comment for this article weren't returned.
Daniel Solin is the director of investor advocacy for theBAM Allianceand a wealth adviser with Buckingham. He is a New York Times best-selling author of the Smartest series of books. His latest book is "The Smartest Sales Book You'll Ever Read."