Cerulli Questions Clean Shares’ Future With Fiduciary Rule Withdrawal

The firm argues clean share classes can stick to their channels with greater free transparency and lower cost.

Given the revocation of the Department of Labor (DOL) Conflict of Interest Rule issued earlier in June, the latest report from the Cerulli Edge questions the future of clean shares in this economic climate.


Share classes have been outlined as “triple-zero” or “double-zero,” designed exclusively for intermediary channels to tackle conflicts of interest, says Cerulli. However, the semi-recent withdrawal has created doubt on whether the share class type will stay within the intermediary channel. Combating this outlook, Cerulli argues clean share classes can stick to their channels with greater free transparency and lower cost.


“From a manufacturer’s perspective, they like the idea of them because they tend to compete a little better with exchange-traded funds (ETFs) on cost,” says Brendan Powers, senior analyst at Cerulli.


According to a recent Cerulli survey, clean shares averaged just 1.8% of 2017 gross sales for asset managers, an uptick in comparison to the 1.5% in 2016. Even with a low percentage rate, 80% of managers in the survey believe clean shares will rise in use over 12 months.


Cerulli says clean shares may appeal to mutual fund managers and distributors as well, as the shares add edge to the fund due to its resemblance to exchange-traded funds (ETFs) and other accounts. When dismantling distribution and service fees from management fees, Cerulli says the cost structure mirrors ETFs.


“Stripping out the asset-based fees, they’re just a bit more competitive,” Powers says. “The competitiveness from the cost structure is something manufacturer’s like, and then distributors are kind of looking to them to use in certain fee-based accounts.”


Similar to mutual fund managers, clean shares can serve investors well in the long term as fees hold higher transparency. Yet, Powers says there are hiccups in the shorter stages, as these investors confuse moving service and distribution fees for indirect payment.


“Investors would have to buy into the concept that the fees they were once paying indirectly through the cost of the product would likely be charged more transparently somewhere else,” Powers says. “So, I think they have a hard time wrapping their head around the fact, or understanding that, hey, you’ve been paying for this all along, it was just baked into the cost of the product before, now you’re just seeing it as a separate item.”


Specifically, the report foresees this as a challenge for distributor adoption, and recommends educational effort from advisers and asset managers. Both will need to work with distribution partners to reorganize payment flows of 12b-1 fees, sub-TA fees and other asset-based fees no longer included in clean shares.


“What the asset managers and distributors would have to do to get investor buy-in over the long term is help them understand that [their] all-in cost is likely not changing, if at all it’s going to decrease,” Powers says. It’s not going to go up, but you’ll be charged less for the product, and you may have more in the form of an up-front commission paid directly to your distributor. I think that’s the narrative with investors, it’s less so that they’re avert to them, more so that I think they would have a hard time understanding why they’re all of a sudden paying a fee directly.”