DEFINITION of 'Clean Shares'

Clean shares are a relatively new class of mutual fund shares. The mutual fund industry introduced clean shares, along with T shares, in response to the Department of Labor’s fiduciary rule. This conflict-of-interest rule was designed to put an end to unscrupulous behavior among financial advisors, such as recommending more expensive fund options to clients so they can collect higher commissions. Because clean shares provide one uniform price across the board, advisors are not tempted to push an expensive fund over a more affordable one.

BREAKING DOWN 'Clean Shares'

According to a Morningstar report, clean shares are the best way to enhance transparency for mutual fund investors. Unlike T shares, clean shares do not have sales loads or annual 12b-1 fees for fund services. Although clean shares carry fees for investment management and administrative costs, these shares do not include distribution fees. However, advisory firms can layer on additional fees for their services. Brokers set their own commissions for selling clean shares, which adds some transparency for investors.

Not only do clean shares lead to higher transparency and fewer conflicts of interest, but this share class could also offer investors big savings. According to the Morningstar analysis, clean shares and other new share classes designed in the wake of the fiduciary rule could save investors at least 0.50% in returns, compared to current offerings. To top it off, investors could receive an extra 0.20% in savings because their advisors will have the incentive to recommend the fund that’s in the consumer's best interest.

 

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