Bond buyers in the dark about broker markups — and not happy about it

Retail investors want more information about the bonds they invest in, according to a new study released today by the Charles Schwab Corporation. Specifically, they want to know what the base price of bonds are and how much they are marked up by brokers. “The fixed income markets are very different from equities,” said Peter Crawford, a senior vice-president at Schwab. “They are much less transparent and less competitive on pricing.” The online survey conducted by Koski Research canvassed 510 investors who had a minimum of $250,000 in investable assets and had at least $25,000 invested directly in bonds that were purchased within the last two years. The respondents ranged in age between 25 and 75 and had an average of $1.8 million in investable assets, with $486,000 of it invested in individual bonds. Of those surveyed, roughly three out of four said they wanted pricing details on their bond transactions. However, 44% said they could not figure out what the mark-ups on their purchases were and 24% did not know how the firm they purchased the bonds from was compensated. “Investors are much more confused about the bond markets than they are about the equities markets,” said Mr. Crawford. For example, 66% of respondents said that competitive pricing on their bond purchases was extremely important and 60% of them understood that prices vary among firms. But 40% of those surveyed said they didn't know how to get the best prices on bonds and 38% said it was too complicated to go shopping for them. The respondents' perceived average mark-up on a $1,000 bond was $6.10. In reality, said Mr. Crawford the mark-ups can run as high as $20, even $30 per bond. Schwab's interest in shedding light on the bond market comes in promoting its BondSource platform, which offers investors and financial advisers access to new bond issues from more than 200 dealers, as well as to the broad secondary market, at a price of $1 per bond. It aggregates pricing information from multiple bond trading platforms and automatically provides investors with the best price available. It also keeps a staff of 100 fixed income specialists on hand to answer questions. Mr. Crawford said the firm hopes to attract more of the advisers who trade on the Schwab platform to buy and sell bonds for their clients through Schwab rather than go outside the system. “We're interested more in the overall relationship than the profit per product,” said Mr. Crawford.