As a follow up to Morningstar’s recent response to the Department of Labor’s (DOL) request for information on the fiduciary rule implementation process, the firm has published an infographic aimed at helping retirement plan professionals answer the crucial question, “How clean are my funds?”

“As we argued in our comment letter, while clean shares have the potential to benefit investors, the DOL must get the details around promoting and defining these shares,” the firm tells PLANADVISER. “If regulators assume that clean shares with sub-TA fees and other kinds of revenue sharing are the same as the cleanest shares without them, they will be endorsing products that can have embedded conflicts of interest.”

Morningstar explains it has “urged the Labor Department to proceed cautiously in using clean shares as a new exempted class for the fiduciary rule, and told the SEC that the definition in Section 22(d) may not protect investors from other potential conflicts.”

Aron Szapiro, director of policy research at Morningstar, adds that “opaque fees and conflicts of interest can hurt investors’ progress toward their goals, which is why Morningstar has created these guidelines for the cleanest share classes.”

Szapiro notes there is general agreement that clean shares will not have front-end loads or 12b-1 fees, which are those used to pay for a mutual fund’s distribution costs. When this is the case, investors will pay an externalized fee for advice—that is, the broker or adviser charges it directly to a client.

“But, there is disagreement about whether clean shares should include sub-transfer agency fees, or sub-TA fees, and other kinds of revenue sharing,” Szapiro says. “A big part of the definition depends on what we expect clean shares to do and how much protection we think they give investors from conflicted advice on their own. As we’ve told the regulators, there is promise and peril in embracing clean shares.”

The upshot of Morningstar’s analysis is that clean shares “have the potential to benefit investors by removing perverse incentives for financial advisers that sell the funds to enrich themselves rather than their clients. By forcing mutual funds to compete on merit as advisers recommend lower-cost, higher-returning funds rather than funds that are most lucrative for the adviser, clean shares could dramatically improve investors’ experiences and their outcomes.”

But, Szapiro continues, there is danger if regulators don’t grasp the key differences involved in sub-TA fees and other kinds of revenue sharing. These kinds of third-party payments obscure business relationships that can push a firm to sell one mutual fund over another. These back-door payments will elevate the conflicts of interest from the adviser level to the firm level, and add opacity to the way mutual funds are bought and sold.”

Morningstar ultimately argues for a cautious and sophisticated approach: “There may be good reasons to use arrangements with revenue sharing or sub-TA fees. For instance, some have argued that sub-TA fees can reduce the costs for accounting. We know that someone has to pay for the services the transfer agency provides. However, we believe that a clean-share structure that adds these payments from the mutual fund to a distributor—as opposed to a third party that has no relationship to the sellers of the fund—requires additional scrutiny to ensure investors are getting best-interest advice. Regulators should not assume that such arrangements eliminate conflicts of interest.”