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New T Share Class Funds Will Push Down Advisor Fees

By Alex Padalka January 10, 2017

A new breed of mutual fund share classes designed to comply with fiduciary standards could drastically reduce how much financial advisors can charge their clients, Morningstar writes. And the research company expects 3,800 of these new classes in the near future.

All mutual funds that offer A shares, which come with different sales charges across fund categories, are expected to soon start offering T shares, which will come with a standardized 2.5% upfront fee or less and an ongoing 0.25% 12b-1 fee, Morningstar writes. For most mutual funds, going from A shares to T shares will halve the initial sales charge, according to the company.

The new share classes were spurred on by the Department of Labor’s fiduciary rule, which requires retirement brokers to put clients’ interests first. Because T share classes are priced the same across the board, brokers presumably would have less incentive to push funds that pay higher commissions, according to Morningstar.

Under the new share classes, brokers will be prohibited from collecting kickbacks from fund companies in the form of dealer reallowances, the company writes. Meanwhile, longer time horizons will put further pressure on asset-based fees compared to transaction-based fees levied on T share classes, according to Morningstar.

Brokerage firms could offer mutual funds at a higher rate to their clients without conflict of interest as long as all the funds they offer have the same fee structure, according to Morningstar.

But since some firms will offer T shares, it’s likely to put fee pressure on others, the company writes. And while T share classes won’t “revolutionize” the industry overnight, they will in the long run, according to Morningstar.

Just as fund fees have come down dramatically over the past decade and brokers no longer win tropical vacations for selling the most in-house products, the T shares could be “a warning shot” for the advice industry, according to the company.