More Managers Introduce ‘Clean’ and ‘Transactional’ Shares

Morningstar finds strong evidence that the two share class approaches are likely to catch on in the ERISA retirement planning industry. 

By John Manganaro | April 14, 2017
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According to a new Morningstar report, the Obama-era Department of Labor (DOL) conflict of interest reforms, while facing an uncertain future, have already promoted real change among advice and investment product providers working under the Employee Retirement Income Security Act (ERISA).

In particular, Morningstar has measured a strong increase in the offering of two relatively new mutual fund share classes, known as “transactional” shares and “clean” shares. As the firm explains, the first share class, commonly referred to as “T shares,” aims to help financial advisers maintain their traditional business model—selling mutual funds on commission—while complying with the letter and spirit of the new conflict of interest rules.

They key development around T shares is that they feature uniform commissions, Morningstar explains, “thereby reducing or eliminating financial advisers’ conflicts of interest in making recommendations to clients.”

As Morningstar explains, the second share class, “clean” shares, “help financial services companies that wish to shift to a ‘level fee’ model in which advisers’ compensation only comes from a level charge on a clients’ assets and not from any varying third-party payments.”

Clearly the developing use of these two share classes will be influenced by the future of the fiduciary/conflict of interest rules, yet client demand for fairness and transparency is also driving the trend. Morningstar observes the rulemaking was originally scheduled to be applicable on April 10, 2017, but the DOL has taken steps to delay it until June 9, 2017. For now the rule is otherwise intact.

Already Morningstar has measured a real reduction in promotion of “A shares,” which have been a traditional and widely used package for adviser-mediated access to mutual funds in retirement plans. Such shares generally “front a sales load that investors pay directly to the financial institution selling the mutual funds, some of which the advisers keep as commission, and these loads vary.” Morningstar warns this variation can create, at the very least, the appearance of an incentive for advisers to recommend a fund with a higher load, “as the adviser stands to make more money from such a recommendation.”

NEXT: Envisioning the impact for flat-fee RIAs