BlogThe New Stripped Down Mutual Fund Share Classes

November 8, 20160

The new DOL Fiduciary rule has barely gone into effect, and it is already starting to shake things up. One of the first changes we are starting to see is a new set of mutual fund share classes. American Funds and Franklin Templeton have already announced new share classes to help advisors deal with the new fiduciary rule. Rest assured, there will be more.

These new share classes are what some are calling “stripped down” share classes as they carry no sales load, no 12b-1 fees and no sub-TA fees. Bare bones. Absolutely no compensation from the fund to the distributor. It is up to the distributor to figure out how to charge their clients and in turn compensate the advisor.

This is quite an interesting turn of events. As with so many things in life, when the pendulum swings way out to one side, it starts swinging back to the other side. Over the years, we have seen a proliferation of share classes, most of which have been devised by the marketing folks trying to facilitate the sale of their funds to any and every conceivable buyer. Long term holders, short term holders, retirement plans, wrap accounts, institutional buyers, big money buyers, mom and pop buyers, etc, etc. If enough new money could be captured, just create a new share class designed to meet the wants of the buyer as well as a way to compensate the advisor and capture that money. The end result is that we now have more than 30,000 mutual fund securities in the US. (Please also read our other blogs on this topic: “What’s the Matter with U: U is Absent in the current offering of 375 Mutual Fund Share Class Names” and “What’s the Matter with U – Part II“)

Why do we need 30,000 + mutual fund securities? Quite frankly, it seems excessive. Maybe an unforeseen benefit of the DOL rule will be a move back to focusing on creating individual products with innovative investment strategies with no share classes. Just a single product with one set of performance metrics that can be easily compared to other single products. An apples-to-apples comparison. No more share class compatibility issues, no more load waived issues, no more social code eligibility rules.

What this means for the future

Of course, in the short-term, we can expect the number of share classes to increase as more funds roll out their stripped down share classes. But perhaps over time, as money flows into the new share classes and some of the older share classes get merged or liquidated, we may see a more reasonable number of mutual funds that are much simpler to understand and compare with other funds. This may turn out to be one of those rare instances where a government imposed regulation may serve as the catalyst to bring a much needed change to an industry that probably never would have happened on its own. Well, we can dream anyway. Maybe my optimism is getting in the way of reality. Since the DOL fiduciary rule only applies to retirement accounts, don’t think that all the other share classes will just go away, but maybe over time we will see a net reduction in the number of share classes being offered.

To stay on top of the new share classes, as well as to continue to monitor changes in the over 30,000 open end mutual funds on the market today, you need the right set of tools. Our Aperio suite of data management tools are designed specifically for pooled investment products like mutual funds.  Whether it be reference data, dividend calendars, daily prices and rates, or corporate actions, AperioSuite covers the entire spectrum of mutual fund data.

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Burton Keller

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