If you want to get the biggest bang for your buck, you might consider mutual funds with 'clean shares,' a relatively new class of mutual fund shares developed in response to the U.S. Department of Labor’s fiduciary rule. According to a Morningstar report, clean shares could save investors at least 0.50% in returns as compared to other mutual fund offerings. Even better, investors could enjoy an extra 0.20% in savings, as their advisors will now be tasked with recommending funds that are in investors' best interests, according to the report.

Mutual Funds with Clean Shares Avoid Conflicts of Interest

Clean shares were designed, along with T shares and a handful of other new share classes, to meet fiduciary-rule goals by addressing problems of conflicts of interest and questionable behavior among financial advisors that were the reason the rule was created. For instance, in the past some financial advisors have been tempted to recommend more expensive fund options to clients to bring in higher commissions. Because clean-share classes provide one uniform price across the board, these shares could put an end to this unethical practice. (For more, see Understanding the New ‘T’ Shares.)

Currently, most individual investors purchase mutual funds with A shares through a broker. This purchase includes a front-end load of up to 5% or more, plus management fees and ongoing fees for distributions, also known as 12b-1 fees. To top it off, loads on A shares vary quite a bit, which can create a conflict of interest. In other words, advisors selling these products may encourage clients to buy the higher-load offerings.

“As the Conflict-of-Interest Rule goes into effect, most advisors will likely offer T shares of traditional mutual funds to retirement investors looking to put retirement savings in an IRA, in place of the A shares they would have offered before,” write report co-authors Aron Szapiro, Morningstar director of policy research, and Paul Ellenbogen, head of global regulatory solutions. “This will likely save some investors money immediately, and it helps align advisors’ interests with those of their clients.”

For example, an investor who rolls $10,000 into an individual retirement account (IRA) using a T share could earn nearly $1,800 more over a 30-year period as compared to an average A-share fund, according to the analysis. The report also states that T shares and clean shares compare favorably with “level load” C shares, which generally don’t have a front-end load but carry a 1% 12b-1 annual distribution fee.

Crystal Clear

According to the Morningstar report, clean shares are the best way to enhance transparency for mutual fund investors. The authors point out that firms distributing funds to investors currently use “indirect” payments. This money goes from the investor to the fund company and then back to a third party for services other than managing the portfolio.

On the other hand, clean-share classes remove all of these indirect payments, and it’s up to distributors to charge investors directly for any services. Brokers set their own commissions for selling clean shares, which adds even more transparency for investors.

Unlike T shares, clean shares do not have sales loads or annual 12b-1 fees for fund services. Morningstar says this will lead to even greater clarity for investors choosing mutual funds with clean shares.

The Bottom Line

As more fund companies roll out mutual funds with clean shares, investors will not only enjoy greater transparency; they’ll also save a bundle on fees. Morningstar predicts mutual fund companies will create 3,500 new T shares in the coming months for IRA investors. Funds you can invest in right now that offer clean shares include American Funds, Janus and MFS. Morningstar expects others will soon follow. They're worth looking for and asking about. (For more, see Mutual Fund Benefits and Types.)

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