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Two New Mutual Fund Share Classes

By Nellie S. Huang
Kiplinger’s Personal Finance

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.

The so-called fiduciary rule, which was issued by the Department of Labor and went into 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.

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 percent, while the average for broker-sold bond funds is 3.75 percent.

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 percent and 0.25 percent, 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.

Editor’s Note: Nellie S. Huang is a senior associate editor at Kiplinger’s Personal Finance magazine, www.Kiplinger.com.


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