Investment Focus | PLANADVISER November/December 2016

The Rise of Zero Revenue Share Funds

The new fiduciary rule will likely augment their growing popularity

By Matt Cirillo | November/December 2016

As the April 2017 implementation of the Department of Labor (DOL) fiduciary rule approaches, the industry is preparing for a change in landscape, both in terms of the investments and advice provided—as well as the compensation model for these services. As advisory fee structures have been evolving over the last few years, interest in bare-bones share classes has risen significantly, with an increasing number of managers adding these products to their lineups. Up from 15 managers in 2011, over 50 managers today offer such “zero revenue share” options—classes, such as R6, without embedded 12b-1 revenue-sharing expenses. Assets in this type of share class have risen to $679 billion.

The popularity of these classes is evidenced by their strong asset growth and increasing inflows. With one quarter still remaining in the year, net flows of $62 billion year to date into zero revenue share classes have already eclipsed the full-year 2015 figures. These classes have exhibited a five-year compound annual growth rate (CAGR) of 35% vs. 20% for retirement share classes, in general.

Historically, these share classes have largely been offered solely to employer-sponsored retirement plans, but, due to their appeal, managers are broadening eligibility to include other institutional investors such as endowments and foundations. Taking this a step further, American Funds recently filed its intent to launch F-3 shares, a zero revenue share class available to retail wealth management clients through fee-based platforms. Additionally, Franklin Templeton has gone public with its intentions to make a similar move in early 2017. These launches will extend the advantages and consistency of such share classes to individual investors and their advisers.

Zero Revenue Shares
Net Flows Into Zero Revenue Share Classes

Zero Revenue Shares

Assets ($MM)
Number of Managers

Net Flows Into Zero Revenue Share Classes

Net Flows ($mm)