Genetic variants in the triggering receptor expressed on myeloid cells 2 (TREM2) have been linked to Nasu-Hakola disease, Alzheimer’s disease (AD), Parkinson’s disease, amyotrophic lateral sclerosis, frontotemporal dementia (FTD), and FTD-like syndrome without bone involvement. TREM2 is an innate immune receptor preferentially expressed by microglia and is involved in inflammation and phagocytosis. Whether and how TREM2 missense mutations affect TREM2 function is unclear. We report that missense mutations associated with FTD and FTD-like syndrome reduce TREM2 maturation, abolish shedding by ADAM proteases, and impair the phagocytic activity of TREM2-expressing cells. As a consequence of reduced shedding, TREM2 is virtually absent in the cerebrospinal fluid (CSF) and plasma of a patient with FTD-like syndrome. A decrease in soluble TREM2 was also observed in the CSF of patients with AD and FTD, further suggesting that reduced TREM2 function may contribute to increased risk for two neurodegenerative disorders.