The benefits of dual share classes may not be shared with the whole class.
With ETF dual share class approval likely around the corner — and as asset managers continue to convert their existing mutual funds into exchange-traded funds — advisors and fund managers are busy preparing to offer the structures to clients. Even Vanguard, the only company to offer the structure before its patent expired in 2023, recently filed as well. The strategy would help mutual fund shareholders avoid unwanted capital gains distributions and retirement savers who would gain access to ETF share classes of traditional mutual funds in their 401(k)s. Mutual funds in general may become obsolete, said Osaic’s chief market strategist Phil Blancato. “The seesaw from mutual fund to ETF asset flows is going to flip so significantly that we’ll be surprised by it, if not shocked by it,” he told ETF Upside.
Knowing which clients to provide dual share classes to — and what types of accounts stand to benefit the most — is key for advisors looking to maximize portfolios.
Capital Gains Pains
As the floodgates open and allow for a broadly available multishare class structure for the first time ever, experts say advisors need education, and a plan in place, to ensure they’ll stay ahead of the curve. Some clients with unrealized capital gains receive distributions, wanted or not, from an actively traded mutual fund every time there’s a tax event or active trading. Dual share classes can help them avoid this because ETF securities can change hands without a distribution, said Brian Spinelli, Halbert Hargrove’s co-chief investment officer. “This could really help us get away from some traditional mutual funds that clients have had to sit on for years, if not decades, because of capital gain issues,” he said.
Three other pros of the structure will benefit clients with retirement accounts, according to Blancato:
- Savings: ETFs’ cheaper fees, lower administration costs, and tax efficiencies will make them a key tool for clients looking to maximize their retirement contributions. (Recent research shows brokerages stand to lose up to $30 billion in fees following approval.)
- Transparency: Shareholders will be informed more frequently where their money is going due to ETF reporting standards.
- Flexibility: Dual share class approval will allow for investing in the mutual fund equivalents of ETFs that might not be allowed in certain 401(k)s because of companies’ rules against including them in retirement plans.
Back to School: Another necessity is educating both clients and advisors — particularly in a world where mutual funds may play a diminished role in the investment landscape. “Seventy percent of the country’s assets are with people over the age of 65 who have no idea what they’re invested in,” Blancato said. “There’s got to be something that says: ‘Hey, your account is going to change. You might notice some changes. Here’s why.’ I think that’s going to be critically important.”