Retirement Plan Investors, Advisors To Benefit
“Clean shares” are a relatively new class of mutual fund shares that originated in Europe and came about due to a Department of Labor’s fiduciary conflict of interest rule. The rule was designed to put an end to underhanded behavior by brokers and advisors by “stripping” commissions and providing uniform pricing across the board. Sounds like a fair solution to high-commission fund options ̶ lower and more transparent costs. However, these funds are not quite as spotless as the name would have you believe.
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Unfortunately, there has been no single definition of “clean.” However, it was universally agreed upon that these shares will not have loads or 12b-1 fees (which are used to pay for a mutual fund’s distribution costs). According to Morningstar, an independent investment research firm, while these shares do leave those fees behind, they may still contain sub-transfer agency fees (sub-TA fees) as well as other types of revenue sharing between a fund’s advisor and intermediaries.
“The term ‘clean’ is too complicated, and I don’t think it’s clear to investors. That’s why we think there’s a need to move to more descriptive terminology,” said Lia Mitchell, a data content researcher with Morningstar.
Morningstar went on to suggest categories for three mutual fund share classes: bundled, semi-bundled and unbundled, in order to better describe each category’s service-fee arrangements between investors, distributors, advisors and asset managers.
Bundled shares include loads, commissions, distribution fees, transaction fees and other operational fees, which closely resemble the types of share classes offered by most advisors working within a brokerage model.
Semi-bundled shares have no distribution or 12b-1 fees, as well as loads, commissions and transaction fees, but still have revenue-sharing arrangements and sub-TA fees. These have been referred to as clean shares, which can be confusing.
Unbundled shares require investors to only pay for management fees and fund operating expenses. These more closely resemble the term “clean shares.” These would normally be used in defined-contribution plans like 401(k) plans.
Each of the categories has their merits, depending on the investor. These terms are just a clearer starting point for investors and advisors to make best-interest assessments. To learn more, email the pension administration services team at Rea & Associates.
By: Paul McEwan, CPA, MTax, AIFA (New Philadelphia)