Regardless of the outcome of the Department of Labor’s fiduciary rule, investment management companies’ adoption of new share classes to comply with the rule may reduce conflicted advice, resulting in more money in investors’ pockets.
That’s the conclusion of research performed in April by Morningstar on the new share classes that have cropped up in order to comply with the rule — including T, Z and P shares. The Chicago-based fund research group probed the potential of these new share classes to help investors save for retirement.
The first new share class to show up was T shares (or “transactional” shares), which are designed to help financial advisors maintain their traditional business model — selling mutual funds on commission — while complying with Labor’s rules.
(Related: DOL Fiduciary Rule Inspires New Alphabet Soup of Fund Shares)
The second new share class, Z, or “clean” shares, may help financial services companies that wish to shift to a “level fee” model in which advisors’ compensation only comes from a level charge on clients’ assets and not from any varying third-party payments.
The Securities and Exchange Commission released guidance in early January to help mutual funds streamline the process of offering certain fee structures associated with the new fund classes that are designed to achieve level compensation consistent with Labor’s fiduciary rule.
The seven-page guidance was issued by the Division of Investment Management and focuses on disclosure issues and certain procedural requirements for offering variations in mutual fund sales loads and new fund share classes.
David Blass, general counsel at the Investment Company Institute in Washington, noted when the guidance was released that the SEC “will receive a large number of share class filings from funds offering variations in fund sales loads or new fund share classes in connection with the implementation” of Labor’s fiduciary rule.
Indeed, Janus filed in late January with the SEC to launch P and Z share classes for all of Janus’ intermediary funds except money markets. Both share classes “give lower sales charge options to our intermediary partners,” according to Janus.
Because DOL’s rule is designed to mitigate conflicts of interest, particularly in regard to fees charged to their retirement clients, including retirement plans and IRAs, DOL “is focused on sales commissions and other fees that may not be considered to be in the best interest of the client,” Janus said in filing the shares.
While Janus received SEC approval to launch the new share classes, the firm has yet to do so.
Paul Ellenbogen, head of global regulatory solutions at Morningstar, told me in a mid-April interview that Janus is likely among the firms in “limbo” as to whether to officially start allowing money to flow into the new shares given the uncertainty over Labor’s fiduciary rule.
Labor postponed the rule’s April 10 compliance date by 60 days, to June 9, and took comments until April 17 on President Donald Trump’s directive that Labor review the rule and consider potentially revising or rescinding it. The industry is awaiting Labor’s next move once R. Alexander Acosta is officially approved by the full Senate as the next Labor Secretary. He was approved by the Senate Banking Committee in late March.