From the December 2011 issue of Research Magazine • Subscribe!

Bond Investors Seek More Transparency

Fixed Income

Many U.S. retail bond investors would like more information about how individual bonds are priced and the way that they’re sold, according to a recent report released by Charles Schwab.  The study found that 73 percent of bond investors surveyed want pricing details, 44 percent can’t figure out how much their bonds are “marked up” and 24 percent do not understand how their bond firm is compensated.

“Investors are tired of being kept in the dark. It’s time for this industry to take a fresh look at how to talk about bond prices and broker fees, and reevaluate whether there is the right transparency and straightforward information available for investors,” said Peter Crawford, senior vice president of Charles Schwab, in a statement.

Schwab developed the “Bond Investor Study” to explore the thoughts of individuals about investing in the U.S. bond market. Conducted in September, it entailed online surveys of more than 500 individuals, each with at least $250,000 in total investable assets and $25,000 in bonds that were purchased within the past two years. The average investor surveyed had $486,000 invested in individual bonds and about $1.8 million in household savings and investable assets.

Two-thirds of respondents say they believe that it’s very important to receive competitive pricing, and half say it’s very important to have a clear understanding of all mark-ups and fees. Also, 60 percent of bond investors understand that bond prices vary across firms, while 35 percent believe they always get the best price from their bond broker.

Furthermore, 40 percent say they do not know how to get the best price on bonds, and roughly 40 percent claim it is either too complicated or too time-consuming to shop for the best price.

According to the Schwab study, half of investors surveyed confirm that they pay some type of additional fee when they invest in bonds. But only 27 percent know what they pay, though they estimate that on average there is about a $6.10 mark-up on the base price of a $1,000 bond.

“Investing in the bond market shouldn’t be an act of faith,” Crawford explained. “It’s clear that bond investors find the fixed income markets opaque and confusing, which is why we have worked to help demystify what they pay and how they can invest.”

Schwab says that its $1.00 mark-up per bond on domestic U.S. bonds is a fee structure that’s simple to understand, among the lowest in the industry, and provided immediately with quoted prices.

Looking for Info

The study revealed that investors have a strong appetite for becoming more knowledgeable about their bond investments, either by relying on advice from financial professionals for bond-buying decisions, doing their own research and analysis, or some combination of both of these.

Two-thirds, or 66 percent, say it is very important to know about issues or risks associated with specific bonds, and 75 percent use online resources when making bond-investment decisions, using online research and ratings on specific bonds most frequently, followed by search and filter tools.

More than 45 percent of investors surveyed say that access to a knowledgeable bond specialist is extremely important.  And 46 percent say it is extremely important to know that their brokerage has no conflicts of interest because it does not underwrite any bonds.

“Is there any other marketplace where a consumer would purchase something without being clear on the costs or understanding what they are buying?” asked Crawford. “We are committed to shining a bright light on the bond market so that individual investors can know more about what they are buying.”

For more details on the study, go online to www.aboutschwab.com/press/research/bond_investor_study. •

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