The Department of Labor’s fiduciary rule has been great for investors looking to operate on a more level playing field and avoid paying unnecessary fees on their investments.

The introduction of a ‘clean share’ class of mutual fund shares is a product of the fiduciary rule that gives investors a more transparent, easy to understand, low cost means of investing in mutual funds. Used properly, clean shares can improve an investor’s risk-adjusted returns.

To learn more about the Department of Labor’s fiduciary rule, click here.

One of the more frequent complaints about working with financial advisors is that they often sell their customers products that come with high commissions and loads to pad their own pocketbooks. The new fiduciary rule, set to go into effect at the beginning of 2018, is designed to help mitigate those conflicts of interest by instructing advisors to put their clients’ interests ahead of their own. To help advisors comply with the fiduciary rule, ‘clean’ share classes were developed. Clean shares do not charge sales loads or 12b-1 marketing fees. Instead, advisors charge an advice-based fee tied to clean shares, based on an hourly rate, assets managed or just a flat fee. This structure is more like that of a fee-based financial planner than a commission-based broker.

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For advisors that don’t wish to move completely toward the fee-based model that comes with clean shares, and still wish to earn commissions on fund sales, there’s a new T-shares class as well.

These shares still generate sales fees for the advisor, but at a generally lower rate than before, helping to reduce any potential conflicts of interest. T-shares, in most cases, charge a level 2.5% front-end load, regardless of the product being sold. This gives investors not only a clearer understanding of what they’d be paying up front, but T-shares often come cheaper than traditional share classes sold through brokers. A 0.25% 12b-1 fee would likely be charged with T-shares to pay for distribution fees and other expenses.

Check out our Complete Guide to Mutual Fund Expenses to learn more.

To get a better idea of what investors might pay with each share class, it’s best to put them side by side. The American Funds Washington Mutual Investors Fund (AWSHX) makes a good example for this exercise. It’s popular among financial advisors due to its combination of strong historical performance and high front-end sales loads.

The A-share class of this fund charges a maximum 5.75% sales charge. It charges a total expense ratio of 0.58%, which consists of a 0.24% management fee, a 0.24% 12b-1 fee and a 0.10% fee for other expenses. A T-share class of Washington Mutual could keep the expense ratio structure, but an advisor would only be able to charge a maximum 2.5% sales load. In this case, the American Funds group might become less attractive to financial advisors if funds with lower sales loads get put on a more level playing field.

A clean share class of Washington Mutual would carry no sales load charges. Investors would instead be charged an advice-related fee, which could come as an annual percentage of total assets managed or a flat annual fee.

Click here to learn more about what goes into a mutual fund management fee.

In the time before T-shares and clean shares, investors could get gouged on sales charges by financial advisors more interested in padding their own wallets, instead of their clients’ accounts. Since fees can potentially have the biggest impact on shareholder returns, there was a need for reform to put less control in the hands of advisors, and more in the hands of shareholders. Selling products with multiple share classes and fee structures became confusing for non-sophisticated shareholders. The fiduciary rule forces advisors to operate in a more investor-friendly manner.

The rule discourages the practice of selling products based largely on the level of fees charged instead of the appropriateness for the client. If advisors work with clean shares, and charge fees based on assets being managed, both investors and advisors can mutually benefit as overall portfolio assets grow.

To learn more about what the new fiduciary rule means for you, click here.

Clean shares and T-shares come with three primary benefits. First, investors get charged less in advisor fees, in most cases. Second, there is greater transparency in fee structures, giving investors a better understanding of what they’re paying for. Third, it discourages the practice of advisors preying on unknowing clients by charging unnecessary fees. Clean shares and T-shares both greatly improve the prospect of shareholders generating better returns over time.