American Funds files for new share class to cut fund expense ratios

F3 shares trim expense ratios by about 37 basis points

Oct 21, 2016 @ 4:26 pm

By Jeff Benjamin

In the latest example of the impact of the Department of Labor's fiduciary rule, American Funds has filed with the Securities and Exchange Commission to create a stripped-down mutual fund share class.

The new F3 shares will be free of commission, 12b-1 fees, as well as the sub transfer agency fees that typically go to brokerage platforms.

According to Matt O'Connor, head of distribution at American Funds, cutting the 12b-1 fees and sub transfer agency fees will trim about 37 basis points from the expense ratios of the mutual funds, leaving just the asset management fees.

“The why behind this share class is a drive toward a higher level of transparency and simplicity,” Mr. O'Connor said.

This marks the third commission-free F-share class for American Funds, which has $1.4 trillion under management and approximately 50 mutual funds.

The F1 share class removed the commission, while the F2 class introduced a couple years ago removed the 12b-1 fee, but maintained the sub transfer agency fee.

“We're now adding another step,” Mr. O'Connor said. “It aids the ability of investors and advisers to compare investment offerings across all structures, and we think the world will end up going here.”

American Funds is already among the lower-cost managers of actively managed mutual funds, but Mr. O'Connor acknowledged that the new share class won't necessarily mean lower fees at the investor level because the fees could still be added at the brokerage platform level.

The F3 share class is expected to be available in January.

“This doesn't mean that all of a sudden there will be a significant decline in what's charged to the investor, but it at least gives the investor full visibility of what they're paying, and market forces will take it from there,” he said. “It will be up to platforms to assess whether that makes sense for their system. Firms have different models, and people pay for advice in different ways.”

In terms of adoption of the new share class, Mr. O'Connor said he is expecting “a longer term evolution,” as opposed to a more sudden shift.

“I think these new share classes will be popular because American Funds has a strong following with advisers, and for very good reason; they run funds with strong track records and relatively low volatility,” said Todd Rosenbluth, director of mutual fund and ETF research at CFRA.

“If you're an adviser that has built a practice using American Funds products you'll now be able to do so with funds that fit more appropriately with the DOL rule,” he added.

(More: A comprehensive, searchable database of advisers' fiduciary FAQs)

However, Mr. Rosenbluth said, the new share class alone isn't likely to have a big impact on attracting new assets to American Funds.

“Many advisers have shifted toward passive management, and this isn't necessarily going to win them back,” he said. “But for advisers that believe in active management, and have been drawn to American Funds, now they have a share class that meets their needs. I think we'll see money rotating from one share class to another, but don't know how much they will recapture money that has already moved out.”

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