Small investors get the short end of the stick when it comes to buying individual bonds. Unlike stocks, bonds are generally sold over the counter, or OTC, rather than through a central exchange.
When an investor goes to buy a bond through their broker, the price they pay is not merely the cost of the security; it also includes the broker's markup for their work in getting the bond. Typically, they will either have an inventory of bonds, or they go a dealer on the customer's behalf. Either way, their compensation can be reflected in the price the investor pays -- completely separate from any stated transaction costs, the markup is built into the price.
But, it's not explicitly stated where the bond price ends and the markup begins. It requires extra effort to compare bond prices and yields: Are you being gouged on your purchase or is the fee fair? It can be difficult to tell.
The good news is that consumers are aware of the lack of transparency, and they're tired of it, according to a recent survey by Charles Schwab.
Seventy-three percent of bond investors want pricing details, and 44 percent say they can't figure out how much their bonds are marked up.
Forty percent of investors say they don't know how to get the best price on bonds, and 38 percent say it's too complicated to shop for the best price on bonds.
From the press release:
Half of investors surveyed confirm they pay some type of additional fee when they invest in bonds. But only 27 percent know what they pay -- which they say, on average, is a $6.10 mark-up on the base price of a $1,000 bond.
The survey shows that there is a lot of confusion over the way bonds are priced for retail investors -- and these were fairly high-level investors, not just people plucked randomly from the phone book.
Over 500 investors with at least $250,000 in investable assets and at least $25,000 in bonds purchased in the last two years responded to the survey. On average, respondents had $486,000 in individual bonds and an average of $1.8 million in household savings and investable assets.
What do you think about buying bonds? Should there be more transparency?
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