American Funds, Others, Back Off T Shares As B-D's Face DOL Uncertainty

The brokerage industry is still up in the air about how to levelize mutual fund compensation in order to comply with the pending DOL rule.
 
And quite quickly, the new T shares, once seen as a solution, don’t look like good options.
 
Uncertainty over the final status of the DOL rule, and questions about whether the new share class is really best for clients, has caused the idea to fall by the wayside.
 
In the last two weeks “we’ve gotten a lot of notification from fund families … that they’re postponing their launch” of T shares, said Rich Calvario, director at Pershing. As a result, Pershing, one of the nation's largest clearing firms, reports just five fund companies ready to go with T shares come January when the DOL rule fully goes into effect.
 
“Among the five that have decided to roll out and launch T shares, American Funds is not one of them, and they’re typically a leading indicator of what’s to come,” said Mitch Bell, also a Pershing director. “In speaking to our [clearing] clients, I hear similar feedback, in that T shares are not a viable solution.”
 
Calvario and Bell were part of a panel discussion about the mutual fund issue this week at Pershing’s annual Insite conference in San Diego.
 
T shares come with a standard 2.5 percent upfront load and a 25 basis point trail, but do not offer rights of accumulation (ROA) or commission-free exchanges within a fund family.
 
That’s led some to question how T shares could be better for certain clients than A shares, or no-load institutional or “clean” shares.
 
“What [T shares] didn’t solve, in our opinion, was the DOL’s desire to [ensure B-Ds act] in the client’s best interest, and the A share gives a client certain privileges that the T share don’t,” said Carly Maher, senior vice president of enterprise initiatives at Ladenburg Thalman & Co. Inc., during the Pershing event. “So we like the A share.”
 
“T shares were really created for small investors who would never reach a breakpoint or a ROA level, so that they would have a way to get service in a buy-and-hold environment,” said Pete Thatch, product management director at American Funds during the panel discussion.
 
In January, The Capital Group, parent of American Funds, obtained a no-action letter from the SEC allowing the new class of “clean” shares stripped of all sales loads and the ability to pay sub-transfer-agent fees, clearing the way for broker-dealers to charge a regular commission on open-end funds just like with ETFs.
 
But that’s not as easy as it sounds. “How do you price it?” Thatch asked.  That’s something B-Ds have to think about, and systems have to be developed to implement commission schedules, he said.