So, what exactly is a T Share?
“T” shares are a newer form of hybrid share class that fund companies designed for short-term investors. The “T” in the “T” share stands for “tax,” due to what has been referred to as a perceived tax advantage. (Globe Advisor)
About 3,800 mutual fund share classes are about to emerge into the market. Experts anticipate that each mutual fund that now has an A share will soon have a companion T share. Note that Fidelity and Janus currently sell shares that are labeled as T shares. They are different than this new breed, and will be renamed.
Some brokers who are strictly transactional based may use this as a selling tool and brag that cheaper is better. Right? Not necessarily. The argument could be made that the T-share will cost less than the institutional class share over 5 years, meaning that transaction-based advice is more cost-effective than fee advice. That, of course, assumes the other costs within the fund are identical. It also ignores the fact that people who work in the true fiduciary realm do not limit their advice to investing in mutual funds but rather evaluate a clients’ financial situation holistically. It’s simply what we do in the fee-only fiduciary world.
It’s also important to note that some individuals in the industry will talk about a “2.5% upfront (declining for larger purchases) and an ongoing 0.25% 12b-1 fee” – The problem here is that we have seen clients come to us indicating that their previous advisor did not utilize the discounts available by using the same fund family. This declining fee sounds great on paper but the question is whether a broker will utilize it as a selling point as a less expensive alternative.
T shares that are held for four years will cost the investor 3.5 percentage points of sales charges: the upfront 2.5 points, plus another point for the four years’ worth of 12b-1 expenses. The same fund held for the same time period in an institutional share class, through a financial advisor levying a 1% asset-based charge, would generate 4 percentage points in advisory fees.
We’re concerned and wonder how often investments at brokerage firms are purchased and then not touched for four to five years. We speculate that very few fall into this category.
“Some of them (referring to the brokers) would prefer a higher amount. There is nothing to prevent them from doing that–as long as every fund in their platform has the same fee or structure, so as to avoid the possible conflict” – If there is nothing preventing them from raising the fee structure some believe that they will in fact be raising it. The Department of Labor (DOL) ruling will have its impact on the brokerage community and the T shares discussion will certainly be added to it.
As always, we welcome your questions regarding T shares along with all other investment inquiries.
Budget the Nest. Julie D. Andrews http://budgeting.thenest.com/t-shares-mutual-funds-28181.html
Globe Advisor. T shares