“They’re gonna put me in the poor house … And throw away the key.”
— from “Poor House,” as performed by The Traveling Wilburys
Let’s talk cars and securities and the prices you pay for both. The share price of stocks won’t vary from brokerage to brokerage regardless of how many shares you buy. Similarly, there isn’t going to be much of a variance in different dealerships on what you’ll pay for a new vehicle. Factory rebates and special offers are often uniform.
Bonds, however, are analogous to used cars. Depending on how large your purchase is and where you buy from, the price can vary significantly. Recently I came across a huge price difference for the same bond from different dealers that amounted to one buyer getting 1.5 percent more yield per year on a short term bond than the buyer who paid the dearer dollar. With used cars, the price that you’ll pay at various dealerships may also vary greatly, depending on inventory, trade-in, and other factors.
Imagine that you step onto a used car lot and tell the dealer that you want to buy 20 cars today. Will you get a better price than if you purchase just one vehicle? Almost assuredly. This is essentially what investment advisors do for their clients that individual investors can rarely accomplish on their own.
Advisors enjoy several advantages in bond purchases. First, they have professional access to the marketplace and deep bond dealer relationships. Advisors can price bonds with multiple brokers and procure the best pricing arrangement for their clients.
Secondly, advisors can buy in bulk for clients, thus driving down the price that is paid for all the clients’ bonds. This is exactly what happened in the previously mentioned purchase. By purchasing the larger, cheaper lot of bonds for my clients, they’ll earn 1.5 percent more in annual yield than an investor who had bought a fraction of the bonds for themselves. With bonds, buying in bulk matters.
Lastly, advisors know the bond market. They study it every day. The quality of the debt; the amount of debt outstanding; whether a bond is callable and its call features and the ability to judge the likelihood of it being called; the fairness of the price being charged; all of these factors are considerations for a buyer.
Again, let’s talk cars. You walk into a dealership having never purchased a car. And you buy from a salesperson who sells cars every day. Which party enjoys the advantage? Same for those who buy bonds frequently and in bulk: that person enjoys an inherent advantage over the first-time or infrequent buyer. Bond buyers are normally at a decided disadvantage when purchasing only occasionally and just for themselves.
Now what color did you want that car in?
Margaret R. McDowell, ChFC®, AIF®, author of the syndicated economic column “Arbor Outlook,” is the founder of Arbor Wealth Management, LLC, (850.608.6121 – www.arborwealth.net), a “fee-only” registered investment advisory firm located near Sandestin.