Choosing a mutual fund is a bigger decision than choosing your breakfast cereal, but branding is just as pertinent. Some funds are brand name offerings from major trading firms, complete with glitzy television advertising and "rock star" fund managers. Others are house-brand funds offered by individual financial institutions or brokerages, available only to people with accounts at those firms. House-brand funds are referred to as proprietary, because they're only available from that company, while brand-name funds are referred to as nonproprietary. Neither is necessarily better than the other, but it's important to understand how and why to choose between them.
Mutual Fund Basics
For those who invest in the world's stock markets, one of the most fundamental pieces of wisdom is diversification: owning a wide range of stocks in different industries and in different regional economies. If there's a crash in one industry or a downturn in one country, diversifying can reduce the overall impact on your portfolio. That's fine for large investors but more difficult for ordinary people with kids and a mortgage. That's where mutual funds come in. They pool your small monthly investment with thousands of others and build a portfolio on your behalf as a single large investor.
Most of the largest and best-known funds are operated on a nonproprietary basis by large investment firms that don't sell directly to the public. They rely instead on a network of relationships with brokerages and financial institutions, which in turn recommend the company's funds to their clients. Nonproprietary fund management companies promote their funds heavily because they're dependent on others to sell or ask for their products.
Proprietary funds are owned and operated by banks, large brokerages and other financial institutions. However, their focus is less on advertising to outside investors. For proprietary funds, the primary marketing effort is directed to their company's existing clientele. For many conservative investors, the idea of having their retirement funds handled by a company they already know and trust is appealing. By eliminating the middleman, proprietary funds can often offer excellent terms to their clients while remaining profitable.
Choosing Your Fund
There's no single, slam-dunk reason to choose proprietary or nonproprietary funds. When deciding, pay close attention to the funds' fee structures. Proprietary funds often have extra fees to discourage you from moving your investment to a different company. Companies are quick to trumpet their historic returns, but a difference in the fees can quickly wipe out a higher rate of return. Remember to look past the numbers and ask about the company's stability. A change of managers can alter a fund's success overnight. This sometimes can be an advantage for proprietary funds, where the house style remains consistent as managers come and go.
- Financial Web: Proprietary Vs. Nonproprietary Mutual Funds
- U.S. Securities and Exchange Commission: Invest Wisely - An Introduction to Mutual Funds
- U.S. Securities and Exchange Commission: Calculating Mutual Fund Fees and Expenses
- Washington State Department of Financial Institutions: Tips on Understanding Mutual Funds
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