Do asset managers—big, boutique and growing—need yet another new share class? The answer is yes if you want to be fiduciary-friendly.
The long-delayed implementation of some of the DOL’s new fiduciary rules finally went into effect on June 9. While there is a possibility that some of the provisions will be modified in the coming months, it’s a safe bet that the overall guiding principle—that all advisors must act in their clients’ best interests and with undivided loyalties when offering advice on retirement-related investments—will remain intact.
Since investment advisers are fiduciaries by definition, the main impact of these regulations will be felt in wirehouses and independent broker/dealers. Brokers who are compensated through sales loads and 12b-1 fees from advisor-class mutual funds will be hard-pressed to prove that recommending these shares doesn’t violate their federally mandated obligation to act in their retirement clients’ best interests.
“Clean Shares” to the Rescue
For brokers who aren’t ready to move to the fee-based investment advisory model, selling share classes that don’t offer a way to earn commissions removes any “compensation incentive” to serve retirement clients.
That’s why forward-thinking asset management companies like American Funds, Janus Capital and MFS are responding to this challenge by creating “fiduciary-friendly” share classes known as clean shares. American’s clean shares will be called F3 shares. Janus will call theirs Z shares.
Reduced Costs, Greater Transparency
Unlike other share classes sold through broker/dealers, clean shares don’t charge sales loads, 12b-1 fees, transfer agency fees or other investor expenses that generate commissions for brokers and other intermediaries. Brokers instead can charge commissions or service fees for buying and selling shares. Since these costs are clearly stated on investors’ account statements, clean shares will give investors a far more transparent view of their actual investment expenses.
“There has been a tremendous proliferation of share classes in the past 15 years, and clean shares could end up simplifying the process,” said Amy Doberman, a partner at WilmerHale, in an article on InvestmentNews.
Jumping on the Clean Shares Bandwagon
If your firm is trying to gain traction for its funds among retirement advisors, clean shares may offer an inroad to compete more effectively against firms that are slow to respond to the realities of the post-DOL regulatory environment.
Selecting Your Firm’s “Clean” Candidates
Since creating any new share class requires a great deal of time and effort, start with a focused selection of well-regarded, top-performing actively managed funds in mainstream asset classes traditionally used in institutional retirement plans and IRAs.
For example, MFS targets its R6 clean share class at defined contribution plan sponsors and advisors,
“Class R6 shares offer plan advisors and plan sponsors greater flexibility when constructing defined contribution plans and investment menu options for participants,” said Ryan Mullen, senior managing director for Defined Contribution and RIA sales at MFS, in a company statement.
For advisors targeting the DC market, offer clean shares in the categories these plans typically offer: large cap, mid cap and small cap core, growth and value; balanced funds; investment-grade bond funds; developed international equity funds and target date funds.
For advisors aiming to win more rollover business, offer lower-risk equity funds and fixed income funds of varying maturities to help them create bond laddering strategies for retirees.
Accentuate “Fiduciary Fundamentals”
In addition to strong returns, these funds should also have strong “fiduciary fundamentals” such as reasonable expense ratios, solid risk-adjusted performance and favorable peer group rankings.
Since your clean-share funds will be competing with those of other fund companies, you may need to revise your fund marketing materials and pitch books to hlghlight these “fiduciary friendly” characteristics.
Because anything you can do to help brokers transition into this post-DOL fiduciary environment can give you a competitive edge in their home offices.