bonds, real return bonds, and the concept of laddering, perhaps Exchange Traded Bond Funds (ETFs), and should not suggest bond mutual funds.
Q: What is the difference between semi-annual and annual yield?
A: It depends on the level of nominal rates. It is an important question, since GICs, for example, are quoted in annual yield terms while most bonds are offered in semi-annual terms. Most firms will convert one to the other for fair comparison. It is in your best interest to ensure that you are being offered an apples-to-apples comparison, since annual yields may appear to be higher than semi-annual yields when, in fact, they may be the same or even lower.
Q: How much commission do you charge on bond trades?
A: If they answer at all, it should be between 0.5 percent and 1 percent. They may be fee based, which is expensive for fixed-income portfolios.
Q: Do you know what duration is?
A: This is important as it represents the risk and volatility of a bond. It is the average term of a bond, including the interest payments.
Q: What is the size of your book and how many clients do you have?
A: A minimum size of $100 million and perhaps 250 clients would indicate a successful IA and one who, therefore, would not need to do frequent transactions to make a living. Ask if they are willing to do a price comparison test with other FIs. It may not be easy to get these answers, but persist. Ask friends, read the financial papers, listen, observe.
Q: If I find the right advisor, how easy or difficult is it to move my account from my existing financial institution?
A: Naturally, FIs are not keen to see customers leave and so they do not make it easy to do so. In days gone by, it was a genuine hassle to move your account. Now the rules have changed and your account must be moved, in cash or kind, within days or the FI faces fines. It also helps that almost all securities are book-based, so this transfer becomes a simple matter of a computer transfer — plus the inevitable paperwork, of course. The FI that you are moving to will expedite the transfer.
To move your account, first open a new account with the new FI. Once that is done, complete, with the help of your new IA, a Request for Transfer Form, which serves notice to your former firm that you would like to transfer your account. The former firm must reply within two days and deliver all the securities and cash, within ten days. For a complete description of this process, visit www.IIROC.ca and look in the Investor Education section.
The absolute worst part of this process is the treatment that you may receive from the FI that you are leaving. There are horror stories of the departing IA being attacked verbally and his clients being given the full court press to stay. Typically, the departing IA’s accounts are divided among some more junior IAs and they really go after these clients. Sometimes, incentives are offered in the way of fee reductions and the like. If you really like your IA, go with him/her to the new FI. IAs do not move often, largely as a result of this treatment.
The advisors you are seeking are not likely to be rookies. They are most likely to have more than ten years of experience with a large, balanced book of clients. They will be working for an FI that has a comprehensive inventory of individual fixed-income products and a variety of tools to make your investing easier. Most major FIs have websites replete with prices, calculators, portfolio-building strategies, and, of course, offerings of all the various products.
There are also an increasing number of institutional bond salespeople who, late in their careers, become retail advisors. They can be of immense assistance to the individual investor given their knowledge of the entire fixed-income spectrum, as well as their ability to take advantage of how the bond market functions. If you are talking to a branch manager of an FI, ask if there is an IA there who specializes in fixed-income products or has a strong knowledge of and a client base in these products. Typically, IAs with only a passing knowledge of bonds are timid and unsure in approaching the trading desk personnel, who, to such IAs, appear to be a bunch of fast-talking, untrustworthy types. Unsure of themselves and of how to interact with the market, they may shy away. However, skillful handling of the information, services, and expert personnel of the typical well-staffed fixed-income department by a person steeped in the knowledge of how this market functions can produce measurable rewards for fortunate clients. Knowledgeable IAs will have access to bargain lists, and will know of important economic releases and the upcoming borrowing calendar. These IAs are well placed to add income and yield to your portfolios. The experienced advisor also gains the respect of the traders, lets them know what his or her specific areas of interest are, and thus gets calls when specific offerings appear.
Following are some representative questions and comments that IAs will use with their bond-trading department.
Q: My client can buy those bonds cheaper somewhere else.
A: This is a loaded one; most of these apparent discrepancies can be explained because this is not an apples-to-apples comparison. In other words, the client (or IA) may be comparing the identical security, but one yield may be quoted in annual terms and the other one in semi-annual terms. At 5 percent this difference is 6.25 basis points even though the price is the same (see the chapter on basic math). As well, the comparison may be hours or days old, and bond prices do change minute by minute. The securities being compared may not be exactly alike; there may be slight differences in maturity, credit, or features that may affect the relative yield between different fixed-income products. Another explanation could be that another investment dealer is offering a special sale. Worse yet, advisors may be trying to get a lower transfer price (the price at which the trading department transfers bonds to IAs). This is the IAs’ cost and they add a markup to earn a commission. If they do obtain a lower price from the trader, that improvement is not necessarily passed on to clients. Needless to say, traders become wise to ploys such as these and handle the offending parties appropriately.
The relevance of this is that it is an over-the-counter market and there are inefficiencies. Clients may receive, or say that they receive, better prices from another FI. It may be because one IA is charging more commission than the other or that one firm’s bond desk is running a special on a certain bond. It does underscore the point that the more experienced your IA is, the better the treatment you will receive.
Q: Why can I not buy this bond at the same price as quoted in the weekend newspaper?
A: This is a very common question. The newspaper quotations are snapshots of market prices at a particular instant, typically 4:00 p.m. the previous business day. They are quotations representing only the market for transactions larger than $1 million and before any brokerage or commissions are added. The large lists of bond quotations in, for example, the weekend Toronto Star or the Globe and Mail are matrix-priced, meaning that each bond is not priced individually but in relationship to the benchmark issues. In such cases, there is no allowance for any idiosyncrasies or features of a bond that could affect its price. What happens is that a keen client, eager to learn the ways of the bond market and therefore studiously following everything, discovers a few really high-yielding bonds in the weekend paper and phones an IA on Monday morning to scoop up these bargains before those slow-moving bond traders catch on. The advisor, of course, smelling a sale, rushes to the bond desk asking for offerings without a shred of thought. In almost every case, these bonds have certain features — usually call features — that mean that the issuer may redeem those bonds before maturity and the advertised yield in the newspaper may not be realized. (The papers may not have the inclination or the space to show the yield to call.) In addition, the issue may also be small, or a private placement, in the hands of foreigners, or the whole issue could have been stripped with no public float at all. There is a public site (www.canadianfixedincome.ca) where you can obtain live wholesale markets. These are also not prices at which individuals will be able to transact, but they do offer valuable market information.
