A proprietary fund is a fund where the sale and manufacture of the fund
are part of the same corporate entity. The obvious advantage of this
arrangement is the company makes profit on managing the fund AND on selling it.
If the salesperson does not offer a variety of competitive funds to you, it
reduces your choices and could mean you are not being offered the best funds
for your needs. “Best “includes such characteristics as risk, cost and
performance.
Sometimes Reps selling prop funds are rewarded more for selling these funds
instead of better, more competitive funds. Over time, this skewed advice can
materially impact your returns and retirement income security.
Another issue with proprietary funds is transferability between dealers. In
some cases, it may mean you will have to sell the fund because it cannot be
transferred “in kind”. This could trigger unwanted capital gains tax exposure
or sale at an inopportune time.
Be aware too that bank-owned discount brokers may not offer competing funds so you
may need to shop around.
Some prop funds can be out- performers of course, just be sure you understand
the potential downside of dealing with a Firm that only sells proprietary funds.
Professional financial advisors would not normally put themselves in such a
conflicted position. It should be noted though, that securities laws do not
prohibit Firms from restricting their product shelf to proprietary funds.
In fact, most bank branches only offer their own proprietary mutual
funds.
Caveat Emptor. Control your own financial destiny or someone else will.
