T Shares

What Are T Shares?

T shares are a relatively new class of cheaper mutual fund shares, meant to give more affordable access to fund management for investors by forcing lower maximum sales loads paid to brokers or advisors. The "T" stands for "transaction." (Don't confound this new T share class, with the T for "tax" shares, a type of no-load share sold by certain brokers.)

The mutual fund industry acquainted T shares in response with the Department of Labor's fiduciary rule, which was intended to put an end to unethical behavior among financial advisors -, for example, recommending a pricier fund option to clients so they'll earn a higher commission. Because T shares give one uniform price across the board, typically lower than typical mutual fund shares, advisors are not enticed to push a costly fund over a more affordable one.

Understanding T Shares

Mutual fund share classes decide the amount of money investors pay to the fund company and the broker when they purchase the investment. The most common classes are A, B, and C shares, yet T shares could eventually replace a portion of these options. Another new mutual fund class of shares is the purported clean shares, which carry no sales load or 12b-1 fees whatsoever, however where a broker or advisor can attach their own advisory fee to it, making the interaction more transparent.

T shares are low-load funds that generally charge a maximum 2.5% load (or upfront sales fee). Most T shares also have a 0.25% 12b-1 fee, which is utilized to pay for distribution and other related expenses. For larger fund purchases, the front-end load may be negotiated lower. These loads are a lot of lower than those of A-shares, which have front-end loads of 5% or more. Some investment specialists foresee that T shares and/or clean shares could eventually replace the popular class A shares of mutual funds, particularly as it relates to the retirement investment marketplace. For example, the popular Washington Mutual Investors Fund Class A, American Funds (AWSHX) carries a maximum front load of 5.75% and a net expense ratio of 0.59% each year. The T share for the same mutual fund would in any case have a 0.59% expense ratio, however the advisor would simply have the option to charge a maximum 2.5% load.

Not just do T shares deliver higher transparency and boost less irreconcilable situations - however these share classes may also offer investors major savings. According to a Morningstar analysis, T shares could save investors at least 0.50% in returns compared to current offerings. Compounded north of several years, that half of a percent can add up to a great deal of savings over the long run - for instance, north of 20 years that savings will amount to over 10% in aggregate improvement on the mutual fund's returns.