How to Get Best Bond Trading Fee
When individual investors buy and sell stock or mutual funds, the fees and commissions they’re paying are no mystery. Typically these fees are clearly spelled out on confirmation statements and in prospectuses.
Not so when they buy or sell bonds. The commissions paid to bond brokers are usually invisible to consumers. They’re not commonly written on customer statements or disclosed over the phone. Consumers who push might actually get the number, but they’re usually told that the commission is “included” in the price of the bond.
Brokers who do give out commission rates generally reveal only part of the equation. Brokers take a commission, and traders (the people on the exchange floor executing the deal) take a “markup,” which is essentially the same thing. Getting a handle on the traders’ markup is virtually impossible for an individual investor, said Gary Pulford, president of Pinnacle Asset Management in Irvine.
Commission or markup, the fees are far from insignificant. Bond brokers commonly charge between 0.5% and 5% of the bond’s value, depending on the type of bond traded. And since bonds are often traded in large blocks, differences in commission rates can cost consumers hundreds--even thousands--of dollars.
An informal survey of five big-name brokerage houses underscores the point. All brokers, who were phoned within a 20-minute period, were asked the same question: What would it cost to buy $10,000 in face amount of a specific 30-year Treasury bond?
The result: The quoted prices ranged from $10,146 to $10,381--a $231 difference. Not all brokers were willing to break out their commission rates, but of the three who finally did, the commissions ranged from $37.50 to $100.
The differences in corporate and municipal bond prices can be even more dramatic. A year ago, Pinnacle Asset Management of Irvine asked 10 brokers for sales prices on two municipal bond issues. The disparity between the highest quoted price and the lowest amounted to more than $7,500 on a $100,000 sale.
In other words, an investor who sold with the firm quoting the lowest price earned $7,500, or 7.5%, less than the investor who sold with the firm offering the highest selling price.
The price disparities have always been around, and they are most acute with bonds that aren’t listed on a major exchange, Pulford noted. But the size of the differences shocked even Pulford, who manages investment portfolios for a living.
“We expected a 2% to 3% spread,” he said. “But these variations really surprised us.”
Although some disparity could be explained by market fluctuations, both surveys were conducted within short periods, and Pulford believes that the bulk of the difference involves broker and trader markups.
So how can consumers find the best deal? Here’s some advice from several bond dealers.
* First, ask the broker his or her commission or markup on the bond.
* If the broker says the commission is included in the price, or refuses to reveal the rate, try the back-door approach. Get a quote to buy a bond. Then say, “What could I get to sell it?” If the broker gives you a second quote, the difference between the two should be the broker and trader commissions.
* Then you should shop around. Even if you think the commission rate is reasonable, get several quotes to make sure. After all, even a mere percentage point difference is $100 to someone buying $10,000 in bonds--certainly worth four or five phone calls.
How many brokers should you call? It depends on the type of bond you’re buying. There are usually fewer disparities in prices for highly rated and actively traded issues, such as Treasuries, so purchasers should be able to do their shopping in three or four calls. Those buying municipals or corporate bonds that are not listed on a major exchange should probably make a few extra calls.
You should make your calls successively, to waste as little time as possible. The bond market does fluctuate: If you call the last broker two hours after the first, differences in the quoted prices could be caused by market moves as well as commissions.
* Finally, if you buy a bond, make sure to take possession of it. That allows you to shop around for the best deal when you’re selling. The brokerage firm that gives you the best price when you buy your bonds may not be the best place to sell and vice versa.
