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The letter to shareholders by Wall Street's sultan shows uncharacteristic humility but some analysts question the missive's sincerity
May 28, 2015 — 6:41 PM UTC by Lisa Shidler
Brooke’s Note: Remember when Tylenol had its bad moment? It didn’t last because the company apologized and made it mission one to avoid a repeat. Maybe I was listening badly after the 2008-2009 meltdown but I don’t recall any such apologies emanating from the wirehouses. But maybe we can consider Jamie Dimon’s letter as a belated case of a company taking stock of itself and setting a trend for the rest of Wall Street. The aircraft carrier of banking and brokerage amalgamation won’t turn around but it may do better in shifting course.
Jamie Dimon is not known for being polite or supplicatory. Why should he be? He is the head of a $2.6-trillion bank — the largest in the United States.
But in a 39-page letter to shareholders dated April 8, the high profile J.P. Morgan chief executive, wearing jeans in the accompanying photo, opened up about the blunders he’s made over the years, how his firm needs to repair its damaged culture and even how he’s begun to embrace those Silicon Valley startups. See: The New York Times exposes JPMorgan’s brokers, yet again.
“Acknowledging mistakes and learning from them is part of the fabric of this company,” he wrote. “We also recognize that we have made a number of mistakes — some of them quite painful and costly — over the last several years. One of the things we learned was that we needed to redouble our efforts around culture — not reinvent our culture but recommit to it and ensure that it is an enduring strength of this institution.” See: JPMorgan breakaways make Page One of the New York Times after $9-billion loss puts spotlight on Dimon’s bank.
The recent mistakes at J.P. Morgan started with the “London Whale” trading losses of $6.2 billion. The culture of J.P. Morgan has the usual Wall Street baggage but it is a many-headed hydra is complicated by acquisitions of Washington Mutual, Bank One, Chase Manhattan and Chemical Bank as well as a legacy of using financial advisors as “distribution units” for selling securities. Dimon’s own cultural business roots are not of the pure J.P. Morgan blue-blood variety as he became part of the company only with the 2004 purchase of Bank One, of which he was president.
Same hell twice
Dimon, 59, isn’t alone in his self-searching. Resolutions to change (i.e. to become more like RIAs) seem to be the rage among wirehouse and IBD executives and are eliciting reactions from RIA industry watchers ranging from impressed to bemused to downright skeptical.
Jeff Spears, chief executive of Sanctuary Wealth Services LLC is paying close attention, is inclined give Dimon credit for having learned from past suffering.
“The reason RIAs should care about Jamie Dimon is he’s built the most successful wealth management business regardless if it’s an RIA or a bank. Jamie Dimon has survived the storm and he’s a little circumspect about what he’s just lived through. He’s both aggressive and he has also learned from his mistakes. He’s basically saying, 'I’ve learned from my mistakes and I am going to make sure I’m not going to live through this hell again.’”
And if Dimon is sincere, Spears says, that could mean trouble for the RIA business.
“I want to learn from him. I see him as a greater leader. He’s survived cancer and is closer to the end of his career than the beginning. He is figuring out what his legacy is and he wants to go out on top. If he is sincere that he is going to affect change then a lot of people should be worried. I think he’s Wall Street 'lite’ but if we believe what he’s saying then he’s moving further away from Wall Street and closer to the RIA and so both RIAs and folks on Wall Street should be concerned.” See: Hiring 'ringer’, Big Four wirehouses launch joint RIA custody unit to stem breakaway broker tide as its leader delivers a reluctant 'sorry’ for the 2008 financial debacle.
If Dimon has undergone a true conversion, he will use his firm’s financial muscle along with his new philosophy to win competition from both RIAs and Wall Street, Spears says.
“If he’s in a competitive pitch for business against a wirehouse, he will say he’s wearing the white hat and the other guy is wearing a black hat. So, who do you want to deal with — the black hat or the white hat? In the RIA world, people will say, 'Oh my gosh, we’re the white hats and that’s our white hat and you can’t wear it.’ But he is going to wear it. So, I think both sides should be concerned.”
J.P. be nimble
In his letter, Dimon says his openness extends to working with Silicon Valley startups — and his humility to saying J.P. Morgan is playing catch-up with the neophytes.
“There are hundreds of startups with a lot of brains and money working on various alternatives to traditional banking,” he writes. “They are very good at reducing the 'pain points’ in that they can make loans in minutes, which might take banks weeks. We are going to work hard to make our services as seamless and competitive as theirs. And, we are completely comfortable with partnering where it makes sense.”
The head of one of those startups, Brad Matthews, founder and chief executive of robo-advisor Trizic, was a private banker at J.P. Morgan before forming his firm. He welcomes Dimon’s new attitude toward robos. See: After Schwab robo launch, Trizic phones leap off the hook as Wall Street brokers and bankers come calling — and VCs write checks.
“He wanted to make sure shareholders knew that J.P. Morgan wasn’t asleep at the wheel. But he also wanted to let employees know that it was a rallying cry. What we find really interesting is that he says he wants to see what firms like ours are doing to innovate and they may want to partner with Silicon Valley firms. Innovation doesn’t happen in a vacuum.”
San Francisco-based Trizic works with RIAs big businesses and certainly would be open to a relationship with a firm like J.P. Morgan, Matthews adds. But he is convinced that J.P. Morgan isn’t a threat to RIAs.
“I don’t think the message is to watch out RIAs here we come and we’ll eat your lunch. RIAs and wirehouses have co-existed for many years. RIAs are more forward-thinking and nimble,” Matthews says. See: Bill Crager: I’ve got your back against the attack of the killer robo-advisors.
Kayak and done
But achieving such lightness of foot is easier said than done.
“Nimble is relevant. A kayak is nimble and you can say the captain of an aircraft carrier wants to be nimble but they both take very different effort to change or navigate. He wants to be nimble and forward thinking but I don’t think it’s a shot to RIAs because I think RIAs are well positioned,” Matthews adds.
Dimon is not the only broker-dealer chief who is exercising humility.
Mark Casady, chief executive of the country’s largest IBD, LPL Financial, had a rather remarkable exchange with analysts during the San Diego- and Boston-based firm’s earnings call on April 30 when he took an unexpectedly sanguine view regarding new Department of Labor rule changes. See: The White House puts its best Obamacare minds behind cleaning up the 401(k) business — starting by issuing a withering memo.
“We have seen the Department of Labor rule proposal evolve significantly over the past four years and we believe the rule will continue to evolve as the Department of Labor seeks to best protect investor interest and preserve consumer choice,” a newly enlightened Cassidy told analysts. “Even as we work to improve the rule for investors, we believe the rule as proposed would not have a material long-term adverse financial impact to our business.” See: As President Obama takes the gloves off, pro-broker groups throw up 'sledgehammer’ response.
And then there’s Merrill Lynch chief executive John Thiel, who recently told InvestmentNews he’s trying to steer Merrill toward goals-based wealth management.
“I was asked when I thought goals-based would be considered a success. I said, 'When 100% of our clients know whether their goals are feasible or not.’” See: Is Merrill Lynch taking its more RIA-like training program another step forward with Racquel Oden’s promotion?.H2. On the run
This new candid attitude on the part of CEOs signals a shift in leadership style, says Michael Kitces, publisher of the Kitces Report.
“It’s the idea that we actually want our leaders to be at least somewhat vulnerable in admitting their challenges. Especially in situations where there are clearly problems in the first place,” he writes in an e-mail. “On the one hand, it makes us more willing to accept that these are hard problems to change — because the leaders themselves have acknowledged/admitted it’s difficult to achieve. Though on the flip side, that also seems to make us more willing to accept that the problem persists as well. After all, their culture hasn’t been fixed, and they’re still in the job!”
But recent outbreak of executive candor may be just as Machiavellian as anything Wall Street has ever done. The new tenor may just reflect the poor hand the wirehouses are holding.
“I think it is a weakly veiled attempt to distract investors and regulators from the real issue: that these aging, commission-based institutions are built on a fundamentally unsustainable foundation of being in business to benefit themselves, and not their clients,” says Tim Welsh, president and founder of Nexus Strategy.
“There are still too many conflicts of interest in terms of opacity, self-dealing and the ability to complicate routine transactions so that the house benefits at the expense of their less-informed clients. It is clear that these executives know that they are on the run, and are deploying stalling tactics so that the court of public opinion and regulators won’t keep up the pressure. They are buying time — but the good news is that technology will run faster…”
But Dimon, at least, hasn’t gone whole hog on the rules-based financial advice model. In the letter he gripes about the effect that the new DOL regs are having on him and his company.
“It’s because of that uncertainty that a majority of the time I spend with analysts and investors these days is devoted to regulation. Very little time is spent talking about the actual business like client transactions, market share gains or other business drivers.”
He adds: “I believe that legal and regulatory costs and future uncertainty regarding legal and regulatory costs have hurt our company and the value of our stock and have led to a price/earnings ratio lower than some of our competitors.” See: Why the DOL’s proposed 401(k) rules could ding brokers and leave the spoils to RIAs.
The legal battles and fees seem to be weighing the firm down, Dimon says.
“We are determined to limit (we can never completely eliminate them ) our legal costs over time and as we do, we expect that the strength and qualify of the underlying business will shine through. During these challenging years, our company has confronted difficult markets, billions of dollars of additional regulatory costs, billions of dollars of costs due to changes in products and services and unfortunately, very high legal costs.” See: How Morgan Stanley and a lesbian super-producer came to grief in South Carolina and why she alleges bias.
Dimon also emphasized that his firm is making real efforts to improve culture and acknowledges that it’s a long-term challenge. “While we have done an extensive amount of work over the past year and a half to make sure we get this right, we know that it can’t be a one-type effort. It’s like keeping physically fit — you can’t get in shape and expect to stay that way if you stop exercising. Our efforts around culture and conduct are substantial…”
He also makes it clear those efforts should avoid any Stalinist-purge-like tinge.
“We need to develop the right culture and avoid creating a culture of finger-pointing. We need to analyze our mistakes because that is the only way we can fix them and consistently improve. But we cannot allow this to devolve into crippling bureaucratic activity or create a culture of backstabbing and blame. We need to develop a safe environment where people can raise issues and admit and analyze mistakes without fear of retribution,” Dimon writes.
Dimon also talks about the firm’s past successes and future successes n a humble key. “We have an outstanding franchise. Our company has emerged as an endgame winner. But we need to earn it every day.”
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Top Executive: Bill Morrissey
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