• Skip to primary navigation
  • Skip to main content
  • Skip to primary sidebar

Wealth Pilgrim

No Money Worries. No Matter What.

Neal Frankle featured in
  • Home
  • Life Insurance
  • Investing
    • Build Strong Investment Building Blocks To Avoid Going Broke In Retirement
    • Systematic Mutual Fund and ETF Investing
    • Stock Market Investing Guide
    • Choosing the Right Investment Brokerage Guide
    • How Bonds Work Guide
    • How Banks Really Work Guide
    • Annuities – What You Need To Know Before You Invest
    • A Beginners Guide To Buying Individual Stocks
    • Create A Pool Of Great Mutual Funds and ETFs To Pick From To Secure Your Retirement
    • ETF and Index Fund Investment Guide
  • Earn More
  • Banking
  • Retirement Planning
    • Retirement Guide
  • Ask Neal a Question
  • Reviews
    • Upgrade Personal Loans Review
    • Lending Club Review
    • Prosper Review
    • Ally Invest TradeKing Review
    • CIT Bank Review
    • LegalZoom Review
    • Lexington Law Review
    • Airbnb Host Review
    • Should You Drive For Uber?
  • Tax
  • Courses
    • Raise Your Credit Score So You Can Buy a House – Free Video Course

What is a Proprietary Fund?

by Neal Frankle, CFP ®, The article represents the author's opinion. This post may contain affiliate links. Please read our disclosure for more info.

If you are an investor you may own a proprietary fund and not even be aware of it. That’s bad news because these funds are expensive and typically perform very poorly. Worse, they belie the relationship between you and your financial advisor.

What is a proprietary fund?

A proprietary fund is a mutual fund that is owned and managed by your brokerage firm or financial custodian.

Why do brokerage firms offer proprietary funds?

For the money. They do it for the money. You see, every mutual fund charges fees. Those annual fees range from a measly .15% to as high as 2.5%.

If the brokerage firm is successful in getting you and lots more people to sink money into one of their proprietary funds, they may end up with hundreds of millions of dollars in those funds. Sometimes it’s billions. And even when you multiply .15% times hundreds of millions of dollars, it adds up to a big pile of money for the brokerage firm.

That is why they often give “extra incentives” to their financial sales people to sell these proprietary funds.

What’s so bad about buying a proprietary fund?

As I said at the start of this post, proprietary funds have a few big drawbacks. First, they are typically very expensive. You have to check this on a case-by-case basis but that’s very easy to do. All you have to do is read the mutual fund prospectus. It’s easy to determine what the broker is charging for these funds. Every time I look at proprietary funds I always find that the fees are outrageously and unjustifiably high.

Also, the performance leaves a lot to be desired. According to the US News and World Report, 64% of the proprietary funds they looked at failed to even keep up with their respective index.

But the big reason you should stay clear of these funds is because when you buy them your broker stops working for you. If a broker encourages you to buy a fund that is owned and operated by her firm, do you think she’s ever going to tell you to dump it even if you should? Of course not. She told you to buy it because she was “encouraged” to do so by her boss – not because she’s doing you any favors. Since she’s already shown her true colors at that point, what makes you think she’s ever going to leave the “dark side” and come back over to work for you? She won’t. Don’t hold your breath.

If a broker does suggest that you buy a proprietary fund, ask her to explain why. Demand to see the track record and fee schedule. While you’re at it, ask to see some competing ideas and then ask your advisor to explain why the proprietary fund is the best choice. That should be a very interesting conversation.

Why people without brokers still have to be concerned about this.

You may have a proprietary fund and not even be aware of it. If you have a 401k or 403b, many plan sponsors have proprietary funds within the plan. Even if you have money at a discount broker, many have proprietary funds and try to get investors to buy them.

How do you know if you own a proprietary fund?

Look for the name of your broker or custodian on funds you own. If you see a match, you’ve got a proprietary fund. That being the case, my suggestion is to make darn sure it’s the best choice by evaluating your mutual fund and the alternatives available to you. My bet is that you’ll quickly get out from under and move on.

What has your experience been with proprietary mutual funds?

Tweet
Pin
Share1

Reader Interactions

User Generated Content (UGC) Disclosure: Please note that the opinions of the commenters are not necessarily the opinions of this site.

Leave a Reply Cancel reply

Your email address will not be published. Required fields are marked *

Are You Human? * Time limit is exhausted. Please reload CAPTCHA.

Primary Sidebar

Who is Neal Frankle

Neal Frankle

I'm a CERTIFIED FINANCIAL PLANNER™ Professional with more than 25 years of experience. I feel very blessed and hope to share my personal financial experience and professional wisdom with readers of WealthPilgrim.
Read More »

Stay Connected

Facebook Twitter YouTube RSS

More Categories

Career Development
College Funding
Credit Cards
Credit Score Fixes
Money and Marriage
Debt Relief
Estate Protection
Property Investment Loans
Small Business Strategies
Spend Less Money

Disclaimer

Wealth Pilgrim is not responsible for and does not endorse any advertising, products or resource available from advertisements on this website. Wealth Pilgrim receives compensation from Google for advertising space on this website, but does not control the advertising selection or content. Please do the appropriate research before participating in any third party offers. The information contained in WealthPilgrim.com is for general information or entertainment purposes only and does not constitute professional financial advice. Please contact an independent financial professional for advice regarding your specific situation. Wealth Pilgrim does not provide investment advisory services and is not a registered investment adviser. Neal may provide advisory services through Wealth Resources Group, a registered investment adviser. Wealth Pilgrim and Wealth Resources Group are affiliated companies. In accordance with FTC guidelines, we state that we have a financial relationship with some of the companies mentioned in this website. This may include receiving payments,access to free products and services for product and service reviews and giveaways. Any references to third party products, rates, or websites are subject to change without notice. We do our best to maintain current information, but due to the rapidly changing environment, some information may have changed since it was published. Please do the appropriate research before participating in any third party offers.


About · Contact · Disclaimer & Privacy policy

Copyright © Wealth Pilgrim 2022 All Rights Reserved