Brocker.Org: Understanding the New ‘T’ Shares


As if there weren’t already enough mutual fund share classes (25,236 of them to be exact, according to the Investment Company Institute), experts predict an onslaught of new classes will storm the fund industry this year. That’s because the mutual fund industry has introduced new T shares – “T” stands for “transaction” – in response to the U.S. Department of Labor’s fiduciary rule.

The rule, which is intended to alleviate the conflicts of interests that arise among financial advisors, demands that advisors act in the best interests of their clients and put their clients’ interests above their own. (For more on this, check out DOL Fiduciary Rule Explained as of April 18, 2017.) As a result, Chicago-based investment tracker Morningstar predicts that up to 3,800 new fiduciary-friendly share classes could emerge in the coming months. Keep reading to learn more about this new share class and a similar alternative.

T Shares 101

The DOL fiduciary rule was designed to put an end to unethical behavior among financial advisors, such as recommending a more expensive fund option to clients in order to rake in a higher commission. T shares could help resolve this particular issue. Because these shares provide one uniform price across the board, advisors will not be tempted to push a pricier fund over a less costly one.

T shares are low-load funds that will generally charge a 2.5% load (or upfront sales fee). Most T shares will also have 0.25% 12b-1 fee, which is used to pay for distribution and other expenses. For larger fund purchases, the front-end load may be lower.

These loads are quite low compared to A shares, which have a maximum up-front load of 5% or more. To top it off, loads on A shares vary quite a bit, which is a red flag in the eyes of the Department of Labor. That’s because advisors selling these products may encourage clients to buy the higher-load offerings. As a result, some investment experts predict that T shares could eventually replace A shares, particularly in the retirement marketplace. (See also: The ABCs of Mutual Fund Classes.)

Two firms – Calamos Investments and Aegon – have already introduced approximately 50 T shares for 50 existing funds. By May 2017, nine other fund companies are expected to launch 234 additional T shares. However, the T share craze probably won’t end there. Another 78 fund companies have already filed to launch 876 more T shares, although the exact launch dates are uncertain.

Unexpected Delays

Thanks to a delay with the fiduciary rule, many firms are in a T share holding pattern. The fiduciary rule was originally scheduled to phase in from April 10, 2017 through January 1, 2018. However, as the rule is currently under review at the direction of President Trump, implementation has been postponed for at least 60 days until June 9, 2017. As a result, some mutual fund companies are holding off on launching T shares until there’s more direction from the Department of Labor.

A Squeaky Clean Alternative

Some fund companies are considering another new product called “clean shares,” an alternative to T shares that also addresses the Department of Labor’s conflict-of-interest concerns. Clean shares carry fees for investment management and administrative costs, but do not include distribution fees. However, advisory firms or intermediaries can add additional fees for their services.

Brokers would set their own commissions for selling clean shares, which adds some transparency for investors. Lord Abbett and Capital Group’s American Funds both offer clean shares, which they call F3 shares. With this offering, they charge management fees but no distribution fees.

Potentially Big Savings

Not only do T shares and clean shares lead to higher transparency and fewer conflicts of interests – but these new share classes could also offer investors major savings. According to a Morningstar analysis, these new share classes that are emerging in response to the fiduciary rule could save investors at least 0.50% in returns as compared to current offerings. To top it off, investors could enjoy an extra 0.20% in savings as advisors will have an incentive to recommend the funds that are in their clients’ best interests, according to the report.

The Bottom Line

Ignited by the Department of Labor’s forthcoming fiduciary rule, fund companies are launching some interesting new share classes. However, due to delays with the new rule, many firms are pumping the brakes on T shares and clean shares until they receive more clarity from the DOL.