More Managers Introduce ‘Clean’ and ‘Transactional’ Shares

By John Manganaro | April 14, 2017
Page 2 of 2 View Full Article

Morningstar goes on to predict directly that mutual fund companies will create more than 3,500 new T share-based products in the coming months, many tailored specifically for advisers to sell to individual retirement account (IRA) and defined contribution (DC) plan investors, “and ultimately this share class may supplant A shares in brokerage accounts as well.”

The research acknowledges that many financial services companies do not sell mutual funds on commission: “Rather, they charge a fee for advice as a percentage of assets under management and generally act as fiduciaries.”

The firm anticipates more advisories to move in this direction: “They can choose to comply with the rule by acting as level fee fiduciaries, which in turn has spurred the development of clean shares. Qualifying as a level fee fiduciary could reduce financial institutions’ legal risks but means that fees and compensation may not vary based on the investments advisers recommend. As many mutual funds pay a variety of fees to the financial institutions that sell their funds—and as these fees vary—the conflict of Interest rule makes them difficult for financial advisers to offer while qualifying as level fee fiduciaries.”

Morningstar concludes that, conceptually, “clean share classes would simply charge clients for managing their money (and other associated expenses) without indirect payments—fees charged to investors by the fund company that they in turn send to an affiliate or third party for services other than managing a portfolio of stocks or bonds.”

This would in effect “strip all these indirect payments away, leaving it to distributors to charge investors directly for any services rendered, such as holding their shares, paying out dividends, operating a web site and call center, and so forth.”

The full analysis can be downloaded here