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 brokers and financial advisors, such as recommending more expensive fund options to clients so that they could collect a higher commission. Because clean shares provide a single uniform price across the board, advisors are not tempted to push an expensive fund over a more affordable one.
Clean shares thus serve to provide investors access to the exact same fund management as other retail mutual fund share classes, but typically with lower and more transparent costs.
BREAKING DOWN Clean Shares
Clean shares were launched in 2017 as a way to improve transparency in mutual fund fees and commissions borne by investors, and to comply with new regulations spelled out by the Fiduciary Rule.
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 front-end sales loads or annual 12b-1 fees for fund services. Although clean shares may carry fees for investment management and administrative costs, these shares do not include distribution fees or commissions. However, advisory firms can still layer on their own additional fees for their services rendered. Brokers often set their own commissions for selling clean shares which can be based on a fixed rate or a percentage, 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.
Example of Clean Shares
As an example, we can compare the costs associated with two different share classes for the same underlying mutual fund. Take the popular The American Funds Washington Mutual Investors Fund (AWSHX).
The class A fund shares charge a maximum load of 5.75% and charges a net expense ratio of 0.57% per year. With a T share class of the same fund, an investor would still pay the 0.57% annually, but their broker would only be able to charge a maximum 2.5% sales load. With a clean share class of AWSHX, there would be zero sales load attached to the transaction. Instead, brokers would be able to charge a separate fee for their advice or ongoing service. Even if their fee is identical across all funds, the investor can be assured that their advisor isn't pushing this particular fund because of its incentive structure.