Monday, February 22nd, 2010
In my recent article, “Bond Strategies in a Rising Interest Rate Environment,”
I talked about bond strategies for the current fiscal environment, in which interest rates are almost sure to rise. But while we’re on the subject of bonds, I also wanted to warn you about a specific trick bond traders use to up their commissions.
The buying and selling of bonds is totally different from the buying and selling of stock. When we go to buy a stock, we can buy it from a multitude of places – an internet broker, a discount broker, a full service broker, etc. And you’ll pay the same price for the stock or fund regardless of where you buy it. The only difference in price is the level of commission you pay based on what type of broker you’re using. The share price itself is pretty transparent.
This is not the case when it comes to bonds. Bonds typically are bought by the brokerage firms, held in their inventory, marked up and then resold to their customers. And this is the case whether we are talking about discount brokers like Schwab, Fidelity and TD Ameritrade or the full service brokers like Merrill Lynch, Morgan Stanley and UBS.
So if you are buying bonds from a broker and the broker tells you there’s a half percent or quarter percent commission, that doesn’t necessarily mean that’s the only money the brokerage firm is making. They could very easily have a two, three, even four percent profit markup added to the price when they sell you the bond. So it pays to shop around.
When we identify a bond that we want to own, we check with multiple sources and compare prices to make sure that we are getting the most competitive price. We’ve had instances where we’ve had a swing of as much as two to three percent in pricing from one broker to the next.
So if you plan on investing in bonds, do your homework before you buy. That way you’ll make sure you – and not your broker – comes out with the best deal.
Tags: bond, bond strategies, brian Fricke, broker, certified financial planner, finance, financial advisor, Financial Management Concepts, financial planner, Financial planning, retirement, retirement planning
