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Not Everyone's Jumping on the T-Shares Bandwagon

By Murray Coleman April 27, 2017

Whether the Department of Labor’s fiduciary rule for retirement advisors survives or not, asset managers are poised to push ahead with a wave of new T-share funds. But not all advisors say they’re ready to jump on board.

“T-shares are a hoax – I’m horrified that people are being put into these funds,” says Lee Munson, chief investment officer at Portfolio Wealth Advisors in Albuquerque, N.M., which manages more than $250 million.

Here’s the promise of this type of share class: Instead of paying higher upfront sales charges depending on asset class, funds family or other distribution criteria, T-shares come with an across-the-board 2.5% load. This can prove a big savings compared to widely used A-shares that can come with loads of 5.75% or more.

Generally, T-shares also avoid 12b-1 and other so-called hidden marketing fees that often can be thrown into the mix, points out Robert DeHollander, managing principal of DeHollander & Janse Financial Group in Greenville, S.C., which manages about $150 million.

That’s a good feature of this fund share class which has been around in one form or another for decades, he notes. Still, DeHollander isn’t planning on using T-shares.

“While this share class might be a step in the right direction considering the current regulatory environment,” DeHollander says, “they don’t fully bridge the fiduciary gap in terms of what’s truly in the client’s best interests.”

Prompting a new push by fund companies into T-shares is the DOL's rule mandating that brokers must act as full-fledged fiduciaries for clients when dealing with retirement accounts. The Trump administration, though, has put the DOL rule on hold pending further review. As a result, many industry analysts are cautioning that much of T-shares’ market acceptance could still hinge on what lawmakers decide in coming months.

But momentum is clearly building. Right now, 54 T-share funds are on the market, according to Morningstar. Yet those come from just four asset managers – Calamos, American Beacon, Transamerica and Columbia Threadneedle.

The industry’s pipeline is growing. Another 77 firms have filed with the SEC to come to market representing some 874 new T-share funds, estimates Aron Szapiro, director of policy research at the Chicago-based investment research firm.

Robert DeHollander

“Only parts of the DOL rule are being delayed – as it stands now, on June 10 anyone giving advice on retirement accounts must still follow impartial conduct standards and the fiduciary definition in the rule’s language,” Szapiro says.

No real enforcement mechanism will be in place, but Szapiro says even if they wanted to it would be difficult for politicians to strip “all fiduciary features” from future regulatory actions.

“We still think in general that advisors will be held to a higher fiduciary standard – the question about what’s going to happen with the DOL rule is now centering on enforcement issues and less on rolling back fiduciary considerations,” he says.

Yet in a business sense, advisor Munson views such a "flat-rate" share class as “not cutting it” for most advisors. As he puts it: “This is like trying to charge the same price for a Honda Civic as a Lexus sedan.”

Dean Harman, an advisor in suburban Houston who manages more than $200 million, says he’s concerned that a flat commission rate will lead clients to want to invest in riskier asset classes. That might pressure portfolio managers to allocate more to junk bonds, for example, rather than more conservative funds.

Harman is also concerned smaller account holders could come under pressure if T-shares rise in popularity and crimp the market for other share classes. For example, he prefers to use C-shares for clients who don’t meet certain custodian and fund minimums.

That’s because such shares don’t typically charge upfront loads and don’t typically assess back-end loads after a year. “So if we’re working with a client with a smaller IRA and their goals change in two years, we can move some allocations around without forcing them to pay another set of commissions,” Harman says.

T-shares can also largely take away an advisor’s ability to take advantage of “rights of accumulation,” he adds. That’s where clients who reach larger asset levels held in a fund can get certain breaks in pricing, commonly referred to as breakpoint pricing.

Harman also doesn’t like how T-shares can eliminate his ability to help clients avoid paying upfront loads when moving into different funds within similar fund families.

“On the surface, this is a share class that might seem like it can make a lot of sense for advisors who want to use load funds,” he says. “But we’ve found that in practice, this share class is a very imperfect solution.”