I have sat across the table from countless clients who, when reviewing their statements, point to a list of mutual funds they own through their bank’s investment arm. “The advisor there said these were their best options for me,” they often say. What they rarely realize is that they are often invested in proprietary funds—financial products created, managed, and sold by the very institution they bank with. This isn’t inherently wrong, but it is a situation that demands scrutiny.
A proprietary mutual fund is an investment product offered by a financial institution that it itself manages. Instead of offering you a Vanguard or Fidelity fund, the bank offers you the “XYZ Bank Growth Fund” or the “ABC Wealth Builder Income Fund.” The bank collects the management fees, and the investment advisor, who is often an employee of the bank or its brokerage subsidiary, recommends them. This creates a vertically integrated, and highly profitable, business model for the bank. For you, the investor, the calculus is more complicated.
In this article, I will dissect the ecosystem of bank proprietary funds. We will explore the reasons they exist, their potential advantages, the significant conflicts of interest they embody, and how to critically evaluate whether they belong in your portfolio. My goal is to equip you with the questions to ask and the metrics to analyze, transforming you from a passive consumer into an informed investor.
Table of Contents
Why Banks Create Their Own Mutual Funds: The Business Case
To understand the product, you must first understand the incentive. Banks are not charities; they are profit-driven enterprises. Proprietary funds serve several key business objectives:
- Fee Revenue Retention: This is the paramount reason. When you buy a third-party fund, the management fee (expense ratio) flows out to an external company like BlackRock or Capital Group. By creating their own funds, banks keep 100% of that management fee within their own corporate umbrella. This is a powerful revenue stream.
- Cross-Selling and Customer Retention: Offering investments deepens the relationship with a customer. If you have your checking, mortgage, and investment portfolio all at one institution, you are far less likely to move to a competitor. It creates “stickiness.”
- Control over Product and messaging: A bank can tailor a fund to fit a specific narrative or strategy its advisors are pushing, whether it’s “ESG-focused,” “dividend-oriented,” or “tax-managed.” They have complete control over the marketing materials.
- Higher Profit Margins for the Advisory Arm: Bank-based financial advisors are often incentivized, through bonuses or quotas, to place client assets into proprietary products. These products typically have higher expense ratios than comparable index funds, generating more revenue for the bank per dollar invested.
The Major Players: A Landscape Overview
Nearly every large national bank with a wealth management or brokerage division has a family of proprietary funds. They are typically offered through the bank’s investment advisory services, not directly on the open market.
Table 1: Major U.S. Banks and Their Proprietary Fund Families
| Bank / Parent Company | Brokerage / Wealth Arm | Proprietary Fund Family Examples | Typical Focus |
|---|---|---|---|
| Bank of America | Merrill Lynch | BlackRock Advantage Funds (via strategic partnership) | A wide range of equity, fixed income, and asset allocation funds. |
| JPMorgan Chase & Co. | J.P. Morgan Wealth Management | J.P. Morgan Funds | One of the largest families, spanning every major asset class and strategy. |
| Morgan Stanley | Morgan Stanley Wealth Management | Morgan Stanley Insight Funds, Parametric Funds | Active and passive strategies, including tax-managed and portfolio completion funds. |
| Wells Fargo | Wells Fargo Advisors | Wells Fargo Advantage Funds (now largely rebranded) | A broad lineup, though Wells has moved towards using more third-party managers. |
| Goldman Sachs | Goldman Sachs Personal Financial Management | Goldman Sachs Funds | Active equity and fixed income strategies for individual investors. |
| Northern Trust | Northern Trust Wealth Management | Northern Funds | Primarily actively managed equity and fixed income strategies. |
It is crucial to note that these funds are often managed by the bank’s internal asset management division, which is a separate entity from the retail bank you walk into. The quality and philosophy of these management teams can vary dramatically.
The Potential Advantages: When Might They Make Sense?
Despite the obvious conflicts, proprietary funds are not universally bad. In certain contexts, they can be a rational choice.
- Perceived Convenience and Integration: For a client who values having all their financial accounts under one login and one statement, the simplicity is appealing. The bank advisor can present a consolidated view of your net worth.
- Access to “Institutional” Strategies: Some banks argue that their proprietary funds offer retail investors access to sophisticated investment strategies and management teams that were previously only available to large institutional clients with millions to invest.
- Performance of Specific Funds: Some proprietary funds do perform very well. A bank might have a particularly strong fixed income team, for example, that consistently outperforms its benchmark. The key is to judge each fund on its own merits, not the brand name.
- Simplified Tax Reporting: Having all investments housed at one institution can simplify the process of tax-loss harvesting and managing cost basis across a portfolio, though this can also be achieved with third-party funds on a single platform.
The Significant Drawbacks and Conflicts of Interest
This is where my professional skepticism comes to the fore. The drawbacks often outweigh the advantages for the discerning investor.
- The Blatant Conflict of Interest: This is the most critical issue. The advisor recommending the fund is an employee of the company that profits from the sale. This creates an inherent pressure to recommend the house product, even if a better, lower-cost third-party option exists. While advisors are bound by a suitability standard (the investment must be suitable for you), they are not necessarily held to a stricter fiduciary standard that would require them to put your best interests first in all circumstances.
- Higher Costs: This is a near-universal truth. Proprietary funds almost always have higher expense ratios than comparable passive index funds from a firm like Vanguard or Schwab. Even compared to other active funds, they are often on the more expensive side. These costs act as a constant drag on your returns. Let’s illustrate this with math.
The Math of Fee Drag: A Comparative Calculation
Assume an initial investment of \text{\$100,000} with an average annual return of 7\% before fees over 30 years.
- Option A: Low-Cost Index Fund with an expense ratio of 0.04\%
- Option B: Proprietary Active Fund with an expense ratio of 0.75\%
The future value of each investment is calculated using the formula:
\text{FV} = PV \times (1 + r - \text{ER})^{n}Where:
- FV is Future Value
- PV is Present Value (\text{\$100,000})
- r is the annual return (7\% or 0.07)
- ER is the Expense Ratio
- n is the number of years (30)
For Option A (Index Fund):
\text{FV} = \text{\$100,000} \times (1 + 0.07 - 0.0004)^{30} = \text{\$100,000} \times (1.0696)^{30} \approx \text{\$761,225}For Option B (Proprietary Fund):
\text{FV} = \text{\$100,000} \times (1 + 0.07 - 0.0075)^{30} = \text{\$100,000} \times (1.0625)^{30} \approx \text{\$612,510}The Cost of Higher Fees:
\text{\$761,225} - \text{\$612,510} = \text{\$148,715}Choosing the more expensive proprietary fund would cost you nearly \text{\$150,000} in potential future wealth over 30 years, assuming identical pre-fee performance. This is the relentless, compounding math of fees that every investor must internalize.
- Performance Questions: Numerous studies, including S&P Dow Jones Indices’ SPIVA scorecard, consistently show that a majority of actively managed funds fail to beat their benchmark index over long periods. There is no compelling evidence that bank proprietary funds, as a category, are an exception to this rule.
- Lack of Portability: If you become dissatisfied with your bank’s services or advisory relationship, moving your account (a process called an ACAT transfer) can be messy if you hold proprietary funds. You may be forced to sell the funds first, potentially triggering capital gains taxes, because the new brokerage platform will not be able to hold them.
A Framework for Evaluation: Questions to Ask Your Advisor
If a bank advisor recommends a proprietary fund, you must become an active participant in the discussion. Here are the questions I would ask:
- “What is this fund’s total expense ratio? Please break down any 12b-1 fees, management fees, or other costs.” Get the exact number.
- “What is the benchmark index for this fund?” Every fund must be measured against a relevant benchmark (e.g., the S&P 500 for a large-cap U.S. stock fund).
- “Can you show me a long-term performance chart comparing this fund to its benchmark?” Look for 5, 10, and 15-year comparisons. Does it consistently outperform, or does it only look good in select time periods?
- “What is the active share of this fund?” This measures how different the fund’s holdings are from its benchmark. A low active share means you’re paying active management fees for what is essentially an index-hugging portfolio.
- “What lower-cost alternatives exist, either as an index fund or an ETF, that track the same market segment?” This question directly addresses the conflict of interest. A good advisor should be able to answer this openly and justify their recommendation despite the cheaper alternative.
- “Are you, or the bank, receiving any additional compensation or incentive for selling this proprietary product?” This is a direct and uncomfortable question, but the answer is telling.
Conclusion: A Matter of Trust and Diligence
My professional conclusion on bank proprietary mutual funds is one of deep caution. While they are not a monolithic evil, the deck is stacked against the investor. The inherent conflicts of interest and the mathematical certainty of fee drag create a significant headwind that must be overcome by consistently superior performance—a feat most active managers fail to achieve.
The convenience of an all-in-one relationship is seductive, but in finance, convenience often has a high, if hidden, price. I advise my clients to view these products with skepticism. The burden of proof should be on the advisor to demonstrate, with clear, long-term data, that the proprietary fund is not just suitable, but demonstrably superior to a lower-cost, widely available alternative after all fees are accounted for.
For the vast majority of investors, building a core portfolio using low-cost index funds or ETFs from a provider like Vanguard, iShares, or Schwab remains the most reliable path to keeping more of your returns and achieving your long-term financial goals. Your bank should be a partner in this endeavor, not a gatekeeper to products that primarily serve its own profit motives. Your portfolio is your castle; be very careful about who you let design the blueprint.
