Zero/Zero Share Classes Hit $1.2t

Regardless of what comes to bear with the Department of Labor (DOL) fiduciary rule—full implementation and enforcement, total repeal or, as is the case now, something in between—its influence is already clearly seen across the industry. With the ongoing focus on fee transparency, only encouraged by this legislation, interest has grown significantly over recent years in mutual fund share classes that facilitate the external payment of fees for services.

Such “zero/zero” share classes—those lacking embedded revenue-sharing, service or distribution expenses—have grown in both availability and assets as the benefits associated with them have been popularized. Assets in this type of share class have climbed to $1.2 trillion as of the end of the third quarter, spread across 74 managers. Net flows of $115 billion into zero/zero classes in three quarters of 2017 have already eclipsed the full-year 2016 figures. Overall, these classes have exhibited a five-year compound annual growth rate (CAGR) of 35%.

While these share classes originated in the retirement market and have historically been offered solely to employer-sponsored plans—the most popular naming convention is R6—many managers have taken note of the funds’ appeal and have broadened eligibility to include other institutional investors such as endowments and foundations. Taking this a step further, American Century, American Funds and Lord Abbett recently launched separate zero/zero share classes specifically available to retail wealth management clients through fee-based platforms.

The launch of these products in the retail marketplace extends their advantages and consistency to individual investors and their advisers as the industry tries to address concerns related to fee transparency and fiduciary duty.