|
|
|
|
THE ONLY WAY TO BUY It cannot be expressed enough how important this next area of discussion is. It’s the difference between adding thousands of dollars to your return on yield, or giving up thousands of dollars on each bond you purchase.
Breaking down the bond purchase in the simplest manner
The most important piece of information for you to take from this is that your advisor has multiple options on how they can sell you a bond. Meaning, how they charge you for the purchase. This can make the difference between giving up thousands or keeping thousands.
Remember, your advisor is working for you and needs to be paid. If you only buy bonds from your advisor and they do not manage any other assets for you, you can’t negotiate with them on the commission price for the bonds. However, if your advisor manages other assets for you, there may be other options. For example:
You have $500,000 in a managed account with a blended fee of about 1.375% annual fee. This is generating a fee of $6,875 a year, at a payout of 35%, putting $2,406.25 in to your advisors pocket.
Say you have quarterly contact with the advisor just to review how you’re doing. Thirty minutes, four times a year, is 2 hours. That’s $1,203.12 an hour you’re paying him, so he should be able give you a break on the bond purchases. If not, get a new advisor. If they are willing to collect a commission of $720.00 which cost you thousands upfront, they should have your best interests at heart.
Below is a hypothetical example of what your advisor might be looking at when he is purchasing your bond. This can vary depending on the company they work for, but the behind the scenes options should be consistent.
Compare the two examples below:
-The first purchased the traditional way: Markup on the bond.
-The second purchased in the manner you should purchase: Commission ticket.
Compare the difference on the color-coded areas between the two options.
Municipal Bond: Arizona General Obligation Coupon: 5% Price: 108.225 Frequency it pays: Semi Annual Quantity: 185 Max Commission: 10.82
Sales Credit: ੦ $ / Bond ੦ $ / Ticket ੦ % Principal Yield-to-Call: 3.876 Price: 108.225 Amount: $200,271.75 Yield-to-Worst: 3.876 Sales Credit: 1.082 Sales credit: $2,001.70 Yield-to-Maturity: 3.988 Net Price:109.337 Net Amount Due: $202,273.45
Municipal Bond: Arizona General Obligation Coupon: 5% Price: 108.225 Frequency it pays: Semi Annual Quantity: 185 Max Commission: $75.00
Sales Credit: ੦ $ / Bond ੦ $ / Ticket ੦ % Principal Yield-to-Call: 3.995 Price: 108.225 Amount: $200,271.75 Yield-to-Worst: 3.995 Sales Credit: 0.40 Sales credit: $75.00 Yield-to-Maturity: 4.096 NetPrice:108.295 Net Amount Due: $200,346.75
Yield-to-Maturity: 3.988 or Yield-to-Maturity: 4.096 what Yield-To-Maturity would you want:
$185,000 @ Yield-to-Maturity: 3.988 for the 12 years you hold the bond equals $88,553.60 minus the markup of $2,001.70 gives you a total earnings of $86,531.90
VS.
$185,000 @ Yield-to-Maturity: 4.096 for the 12 years you hold the bond equals $90,931.20 minus the commission ticket of $75.00 gives you a total earnings of $90,856.20
That’s $4324.30 more in your pocket by simply paying a $75 commission, and that’s only on one bond purchase.
There is only one way to buy a bond and that’s without a markup. Buy your bonds with a commission ticket!
The markup is not required to be disclosed on your confirmation. This has been an advantage of the advisor because the investor does not contest a commission. The Municipal Securities Rulemaking Board (MSRB) does not require the markup disclosure, but there has been discussion to disclose markups on client confirmations in the future.
You would be better off paying the commisson ticket which you pay anyway, and keep the higher yield over the 12 year period.
Again, if your advisor manages your assets in a fee based manner, he should be buying your bonds at the minimum commission, which should be around $75.00.
Shawn Tierney
Financialjoe
|
|
|
|