Fiduciary Rule Gives Rise to Two New Share Classes

Mutual Funds

Fiduciary Rule Gives Rise to Two New Share Classes

The landscape is changing for those who buy mutual funds through brokers.


You may have heard of A, B, C and other classes of mutual fund shares. Now, get ready for T shares and “clean” shares, the industry’s answer to a new government rule that requires brokers to act in their clients’ best interests.

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The so-called fiduciary rule, which was issued by the Department of Labor and was set to take effect in June, applies to anyone giving investment advice concerning a 401(k) or individual retirement account. If you manage your own retirement account, you’re probably buying no-load mutual funds, so little of this applies to you. But investors who work with brokers have traditionally purchased a load fund’s Class A shares and compensated the brokers by paying front-end commissions. Investors in A shares also paid annual 12b-1 fees to provide extra, ongoing compensation to brokers.

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The DOL decided that the traditional fee structure poses a potential conflict, in part because the charges vary widely with the type of fund. For example, the average load for broker-sold stock funds is 5.47%, while the average for broker-sold bond funds is 3.75%. The difference, says Aron Szapiro, director of policy research at Morningstar, might influence a broker to recommend a stock fund for a client when a bond fund might be more appropriate.

The new Class T shares, many of which have yet to launch, level the playing field by setting the load and 12b-1 fee at a uniform 2.5% and 0.25%, respectively, across all funds and firms. Szapiro expects most funds with Class A shares to issue T shares. But T shares may be “a transitional” solution, he says, because they’re a form of the old commission-based pay structure, which is a business model in flux.


And that’s where clean shares come in. Some fund firms that charge loads will issue shares—their designation will vary from firm to firm—that don’t levy a load or a 12b-1 fee. Your adviser will still charge you for advice, but that charge will be separate from your purchase of any fund shares. Szapiro says this fee “unbundling” gives investors a clearer picture of what they’re paying for.

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