Bond investors could pay as much as US$2,000 in transaction fees for their purchase of bonds worth US$100,000, or they could pay as little as US$100 for that same purchases depending on where they choose to do business, according to Fidelity.
Ram Subramaniam, president of Fidelity’s retail brokerage business, said: "Shopping for bond prices should be no different than comparison shopping for the best deal on a car, TV or other big-ticket item.
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"Bond prices – whether for corporate or municipal (muni) – vary widely, so retail investors should ensure they take the time to comparison shop, as it can save them thousands of dollars and, in turn, improve the bond’s yield. The general lack of transparency in this market means investors can be disadvantaged if they are not careful shoppers," Subramaniam added.
Unlike equity markets, which are liquid and enjoy pricing transparency, bond markets have not historically had a continuous two-way market of buyers and sellers, and bond transaction fees at many brokerage firms can be hard to decipher.
Transaction fees are as low as 0.01%, or as high as 2% or even higher of a bond’s face value. Brokerage firms charge transaction fees in one of two ways:
- A fee clearly stated as separate from the offered price of a bond
- A markup fee that is bundled with the price of the bond
Markup fees makes it difficult for retail investors to know the real price of the bond versus how much is going to their brokerage firm.
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By GlobalData"Understanding bond transaction fees and being able to find the lowest markup is very important, particularly in today’s low-interest environment. If you’re buying a bond that yields 3% and are charged a 1 or 2% markup, you’re going to erase US$10 or US$20 from your first year’s income of $30 from the bond," Subramaniam added.
Lower Bond Pricing Can Equal Significant Savings
Fidelity Investments teamed up with industry research firm Corporate Insight and commissioned them to study bond pricing for retail investors from five selected commission and markup-based firms providing access to corporate and muni bonds trading in the secondary market.
The study found that Fidelity, which charges a flat US$1 per bond transaction fee, was less expensive 98.6% of the time versus ‘markup-based’ brokers that bundle transaction fees with the price of the bond.
The study compared Fidelity to markup-based brokers, and on average these competitors had charged US$15.47 more per bond. For a hypothetical Fidelity customer who invests/reinvests US$100,000 in face value of bonds per year, that would have been an average annual savings of US$1,547, and for a customer investing US$500,000, that would have been a savings of US$7,735.
A Large Bond Inventory Can Equal More Choice
In addition to price, investors should ask themselves if their brokerage firm has the variety and quantity of corporates and munis to give them an acceptable range of options. Also understand if their firm offers bond research and screener tools to narrow the thousands of bonds to their individual needs and fixed income specialists available to assist with those choices.
Corporate Insight observed that Fidelity had offered access to 285% more total corporate and muni bond CUSIPs on average on Fidelity.com than its markup-based competitors did on their websites during the review period.
"Fidelity aggregates one of the largest bond inventories available, from multiple providers, creating in essence a virtual marketplace. This encourages competition among dealers to offer the lowest price on a particular bond. When comparison shopping, it’s important for bond investors to look at the overall value proposition of a brokerage firm, including price, choice and service," Subramaniam added.
