October 26, 2011

Most Investors Don’t Know How Bonds Are Priced: Schwab Study

Three-quarters of buyers want pricing details, but nearly half can’t figure out what a bond actually costs

As investors show more interest in fixed-income products, advisors are seeking more access to the often byzantine world of bond buying—but a Charles Schwab study released Wednesday shows that brokerages aren’t sharing enough information about how individual bonds are priced.

While 73% of bond investors want pricing details, 44% can’t figure out how much their bonds cost and 24% don’t understand how their bond firm gets paid, according to Schwab’s online bond investor study, conducted by Koski Research in September.

At the same time, two-thirds of the study’s 510 respondents said it’s “extremely important” that they receive competitive pricing, but they’re resigned to the status quo in accepting the bond prices that firms quote to them.

Peter Crawford, Charles Schwab“Many advisors have grown up in an equities-oriented world,” said Peter Crawford (left), senior vice president of Charles Schwab, in an interview on Tuesday in New York with AdvisorOne. “Now they have more clients who want fixed-income help.”

Baby boomers reaching retirement age represent a large number of investors turning to fixed-income products, of course. At the same time, investors in every demographic are expressing more interest in bonds as a safe haven during this period of market turmoil and uncertainty. The trouble is that the fixed-income segment is notoriously huge, opaque and fragmented, which explains why financial services firms such as Schwab are looking to make bond investing a more efficient and transparent marketplace.

They’re doing it primarily online. Schwab’s offers more than 36,000 new and secondary bond issues from more than 200 dealers on its BondSource platform. The platform includes online resources for registered investment advisors as well as individuals. Much like browsing for merchandise available on Amazon.com, bond-shopping RIAs can compare prices and broker fees by going to www.SchwabAdvisorCenter.com and clicking on a CUSIP.

Schwab’s aggregation of over-the-counter bond market offerings in a single place lets investors choose, for example, among five to eight quotes from different dealers for a single corporate bond issue. “We take this balkanized OTC market and bring it together for our clients,” Crawford said.

“The interest rate environment is really challenging for investors right now, so they can at least control costs if not yields,” added Patrick Luby, a former UBS head of product strategy who came on board with Schwab in August as a fixed-income managing director. Luby’s mission is to bring bond market transparency to RIAs and individual investors.

To be sure, Schwab is not the only financial services firm seeking a more efficient and open bond market. For example, Fidelity’s Fixed Income Quick Searches allow investors to sort through 30,000 individual bonds using either a name or CUSIP search.

At Schwab, investors have access to a variety of U.S. bonds, screening tools and research, and guidance from bond professionals to help them make more informed bond investing decisions. Schwab charges a $1 mark-up per bond on domestic U.S. bonds.

It’s a fee structure that’s simple to understand and among the lowest in the industry, Luby said. This compares to the Schwab study results showing that only 27% of bond investors knew what they paid, which they said averaged a $6.10 mark-up on the base price of a $1,000 bond.

Read Fed’s Operation Twist Offers Bond Investment Opportunities at AdvisorOne.com.

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