Is JPMorgan too big to manage?

The guilty plea by JPMorgan Chase & Co. to criminal charges of manipulating foreign exchange prices poses a dilemma for the Department of Labor, financial advisers and individual investors.

With $938 billion of assets under management, the giant bank is the seventh largest manager of institutional assets worldwide. Of that total, $329 billion is for U.S. retirement plans, endowments and foundations, according to InvestmentNews’ sister publication Pensions & Investments. JPMorgan is also one of the largest managers of central bank assets, sovereign wealth funds and insurance company assets. It also manages mutual fund assets and the accounts of wealthy individuals.

But JPMorgan broke the law and breached the trust of all of those clients, as did four other banks that also pleaded guilty, though they are not as significant in asset management, and particularly U.S. tax-exempt assets.

The Securities and Exchange Commission could have sent JPMorgan’s asset management unit to the penalty box for a time after its guilty plea, but instead the agency granted JPMorgan and the other banks waivers to continue offering their services. In doing so, it likely considered the disruption that such action would cause not only U.S. clients, but also international heavyweights such as central banks, sovereign wealth funds and mutual funds, and through them the capital markets.

The banks also need exemptions from the Labor Department to continue managing assets for U. S. pension funds. In the case of JPMorgan, because of its size, that presents a particular dilemma for the DOL. The DOL has to decide whether to grant an exemption to allow JPMorgan to continue managing billions of dollars of U.S. retirement assets or to refuse to grant the exemption for a time, in effect placing the huge bank into the penalty box at least temporarily and causing its retirement plan clients to find new managers.

Clearly, JPMorgan should suffer some penalty other than the almost $1 billion fine it has agreed to pay. Any additional penal-ty must ensure the bank has taken steps to fix the behavioral and management problems that have become evident in the past decade, from apparently ignoring signs that Bernie Madoff’s operation was a scam, to robo-signing of mortgage-related documents, to the “London Whale” transactions in credit default swaps that led to an $8 billion loss.

Given the difficulties a refusal to grant the exemption would cause thousands of institutional clients, the DOL likely will grant it on condition of closer supervision by the agency, but it also could forbid JPMorgan to add clients for a specified period.

DILEMMA FOR ADVISERS

The dilemma for financial advisers is whether they should encourage clients who have relationships with JPMorgan Chase to consider ending those relationships because of the bad behavior of so many bank employees and the apparently lax supervision from the top of the organization on down.

The answer should depend on the depth and strength of the relationship between the clients and the bank, and on how much confidence the clients have lost in bank management. Advisers can’t make the decision for clients, but they can raise the issue: Is there a better place for their accounts?

Likewise, individual investors who own JPMorgan stock must consider whether the accumulation of missteps by the bank has so eroded its reputation that its stock price will suffer over the long run compared with other financial institutions in which they might invest.

The stream of scandals involving JPMorgan, most suggesting failure of oversight by its management, raises the issue of whether the bank has become too big to manage. If that is the case, perhaps bank regulators will take a fresh look at breaking it up. That would raise additional issues for clients and financial advisers.

Until the past decade, it was said that no one ever got fired for hiring JPMorgan for financial services. That might no longer be true.