Why do brokerage firms and their financial advisors offer proprietary funds?
It is simple. They do it for the profit.
If a brokerage firm is successful in strong arming it’s advisors through incentives and goals, 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. Good for the advisors and the brokerage house, not so good for their clients.
What’s so bad about a proprietary fund, as if you don’t already know?
Proprietary funds have a few big drawbacks. First, they are typically very expensive. We all know the majority of house funds sport fees that are unjustifiably and outrageously high.
Also, their performance leaves a lot to be desired. According to the US News and World Report, 64% of the proprietary funds they examined failed to even keep up with their respective index. So basically, higher fees and lesser performance. Not a winning combination to be proud of.
But the big reason consumers should stay clear of these funds and their brokers who push them is because when consumers buy them their broker stops working for them. If a broker encourages a client to buy a fund that is owned and operated by the firm, do you think the broker are ever going to tell their client to dump it even if they should? Of course not. These financial advisors have their clients buy their house funds because they are “encouraged” to do so by their boss – not because they are doing the client any favors.