Unless you’ve been living under a rock, you’ve heard of the impending DOL fiduciary rule. While it’s unlikely the DOL Rule will go into effect as initially proposed, some form of it will likely persist because, as they say, “you can’t un-ring a bell.” 

The rule will essentially make all who work with retirement plans or provide retirement planning advice become a fiduciary – meaning they are legally and ethically bound to act in the best interest of their client. This new rule will likely have the largest impact on those working on commissions. 

Over the years, “wrap” programs have continued to increase in popularity, pushing firms toward using mutual funds’ least expensive share classes. In response, many advisors were increasingly earning their “fees-for-service” through charges to investors directly.

“Overall, nearly all (80%-90%) mutual fund sales through financial advisors are within some form of wrapped programs where investors are charged a fee-for-service. Inversely, likely less than 10% of mutual fund sales today are in platforms using point of sales (POS) commission.”

Advisors and Broker Dealers have adjusted their revenue models – the majority generating revenue through ongoing fee-for-service, rather than on point-of-sales commission. In response to these trends, the SEC increased monitoring of share classes and sales. New share classes are being proposed that address the rule and respond to marketplace pressures.

Introducing “Clean” shares and “T” Shares

The Clean share classes, suitable for both retirement and non-retirement accounts, have little or no embedded costs. Brokers set their own commissions for the sale of the shares with no distribution related payments.

T shares will have a POS charge of 2.5% (breakpoints up to $1 million and 1% sales load for all transactions $1 million and above.) There will be no separate Shareholder Servicing Fees, and, if a firm introduces T shares, it is likely existing share classes will be closed and AUM will be exchanged to the new T share.

Avi Nachmany has written an insightful paper on the topic, A Perspective on Mutual Fund Share Class Development, that discusses the evolution of these new share classes. Mr. Nachmany has a unique perspective on the mutual fund industry. In the mid-1980s he co-founded Strategic Insight(SI), a thought leadership and business intelligence firm for industry leaders.


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Avi Nachmany, Guest Author