Are mutual funds buckling under fiduciary pressure?

Are mutual funds buckling under fiduciary pressure?

Are mutual funds buckling under fiduciary pressure? In Canada, new disclosure rules under CRM2 have resulted in an increased focus on fees and transparency. In contrast, an incoming fiduciary rule designed to protect retired investors in the US is in the sights of the pro-business Trump administration.

But even if the US rule never kicks in, it may still end up helping investors — by pressuring mutual funds to lower costs and increase fee transparency.

The fiduciary rule, introduced by the Obama administration, seeks to eliminate conflicts of interests among financial advisors working with retirement savers, reports Fortune. Originally scheduled to roll out on April 10, it has been delayed until June 9 — and it may stay in limbo indefinitely.

Regardless, it looks like the fund providers have already blinked. International investment research firm Morningstar has reported two new share classes issued by mutual fund companies. The new classes, called transactional shares (T shares) and clean shares, would essentially let mutual fund firms lower fees and increase transparency for clients without having to give up their commission-based business model.

Traditionally, many savers investing in mutual funds through a broker would purchase A shares of those funds. Such shares would come with upfront fees as well as built-in management costs and distribution expenses. Some of the fees would be used to reward the broker — a setup that critics have said leads to a conflict of interest, especially since front-end fees vary between funds.

T shares eliminate that possible conflict because they have uniform front-end commissions that are free from entanglements between the advisor and the mutual fund. T shares are also cheaper, with a maximum upfront fee of 2.5%, compared to more than 5% for A shares. Morningstar estimates that moving one’s holdings from A shares to T shares would put the investor ahead by US$1,789 per US$10,000 invested after 30 years.

Clean shares, on the other hand, change the payment scheme for firms that distribute funds to individual investors. Under a clean-share model, no fees are passed to intermediaries or third parties, making it easier for advisors to clearly explain what the fees are for and where they’re going.

Morningstar did not report which fund providers have issued these new share classes.


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