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BUYING AND SELLING BONDS

Ways to Buy Municipal Bonds

When considering whether to buy or sell a municipal , can ask themselves the following questions to help determine which of several investment methods may work best.

c How comfortable are you with making investment decisions?

c Do you want personal contact and the ability to ask questions of a professional?

c Do you want to have an advisor pursue an agreed-upon strategy and execute on your behalf?

c Do you wish to manage your own account?

c What fee structure do you prefer, taking into consideration the frequency of your trades? Access other resources for investors in the Depending on investment needs, desired Investors seeking over a time MSRB Education level of involvement investors want in period and the full return of principal, and Center. the purchase process and what type of who trade infrequently, might consider fee structure is appropriate, investors a broker-dealer charging mark-ups or have a choice in how to participate in the commissions. Investors who wish to trade : bonds frequently might consider an 1. Use the services of a broker-dealer or account that does not charge on a per- a department that is a municipal transaction basis. An seeking a securities dealer; wide range of bond exposure (sectors, maturities, ) but who has limited 2. Hire an investment manager who can funds (a typical minimum denomination to locate and trade bonds on your specific buy a single bond is $5,000) might consider instructions or general authority; a or ETF. To make an informed 3. Engage in direct online trading through decision, consider some of the attributes of a self-managed account; or each of these methods. 4. Buy or sell shares in a municipal bond mutual fund or exchange traded fund (ETF).

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© Municipal Securities Rulemaking Board 2018.1 1 Ways to Buy Municipal Bonds

Use a Full Service Broker-Dealer local government entities that issue the A full-service broker-dealer1 or a bank bonds, as well as with investors. department that is a municipal securities Brokerage Fees dealer facilitates transactions on behalf of investors and has access to the expertise Full-service broker-dealers often charge of its employees. At a full-service broker- a fee, called a “mark-up” when they dealer, a broker who primarily deals with buy bonds on behalf of investors and a individual investors is called a private “mark-down” when they sell bonds for client broker. A private client broker may investors. Mark-downs are usually smaller also have the title “financial consultant” or than mark-ups for several reasons. First, an Remember that “financial adviser.” Purchases and sales of investor who wants to sell a bond usually in full-service municipal bonds though a broker-dealer has fewer questions than an investor who broker-dealer are preceded by a discussion with the is considering whether to buy a bond. accounts, once you investor, and the investor must give an Second, the ongoing operating costs receive disclosure explicit to buy or sell securities in a of receiving and paying to the investor, or processing possible bond calls, and suitable brokerage account. will no longer be borne by the broker recommendations, Broker-dealers have established legal whose client is selling the bond. you are responsible duties to investors. For instance, a for the decisions to broker-dealer is required to disclose to Mark-ups and mark-downs are included buy or sell. investors all material information about in the total price shown on an investor’s any municipal it sells and must trade confirmation. But, for certain offer a fair and reasonable price when an transactions, broker-dealers must also investor is buying or selling a municipal separately disclose on the confirmation security. Also, a broker-dealer must only the amount of the mark-up or mark-down recommend securities that are suitable for charged. Additionally, some broker-dealers the investor’s investment needs and voluntarily disclose the amount of the tolerance. Remember that in full-service mark-up or mark-down charged, even broker-dealer accounts, once you receive when not required to do so by MSRB disclosure and suitable recommendations, rules. You should always feel free to ask you are responsible for the decisions to buy your financial professional how much your or sell. Broker-dealers are not required to purchase or sale was marked up or down if meet fiduciary standards.2 you don’t fully understand the cost of your transaction. While a broker-dealer generally has the best access to newly issued bonds because Mark-ups and mark-downs are charged it typically participates in the initial offering when the broker itself acts as a principal in of bonds to the market, investors should the trade. The broker is “one side of the understand that the broker-dealer is also trade.” The bond comes out of or goes required to deal fairly with the state and into the broker’s inventory, however briefly.

1 Information about both a broker and a broker-dealer firm is available at: http://brokercheck.finra.org. 2 See 15 U.S. Code § 80b–6.

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Ways to Buy Municipal Bonds 2 In some cases, investors want a broker bond on the MSRB’s Electronic Municipal to act as agent in facilitating a purchase Market Access (EMMA®) website can or sale of a municipal bond that is not provide an indication of what the in the broker’s own inventory. In these should be. In the event there are no trades types of purchases and sales (called as- in the specific security, EMMA’s Price. agent trades), the broker does not act as Discovery Tool helps users find comparable the “other side” of the trade but helps securities. If the yield you are receiving A registered find a buyer or seller for a bond. In such seems out of line with comparable trades, investment adviser cases, there is still a fee charged for that ask questions. can be affiliated service, but it is called a commission. Commissions are separately shown on a Hire an Investment Manager with a broker-dealer trade confirmation. or independent A registered investment adviser (RIA) manages accounts and makes purchases investment adviser. Full-service broker-dealers may also charge and sales in accordance with an investor’s A broker-dealer fees associated with the delivery of trade agreed-upon strategy, without getting can register its confirmations or other trade processing individual approval for each transaction. employees both fees. RIAs have a special obligation to investors, ways to allow you, called fiduciary duty. An RIA must put your Getting a Fair Price the investor, to first in advising you and managing MSRB Rule G-30 requires brokers and choose which kind your account. When you hire an RIA, you municipal securities dealers to charge should get written information that explains of relationship you fair and reasonable prices. For principal both the investment policy that applies to want. If you engage transactions, the “all-in” price, including your account and the investment process one firm to serve mark-up or mark-down, must be fair and used by the RIA. RIAs often combine as custodian (hold reasonable. For agency transactions, the purchases for several clients by trading in your securities), financial entity must try to get a fair price larger blocks to obtain a better price. related to prevailing market conditions and but require it to must charge a fair commission. MSRB Rule RIAs usually charge a management fee to take orders about G-18 requires a dealer to use reasonable account holders. Some advisers charge your account from diligence to determine the best market an annual percentage of an investor’s an independent for a bond and execute in that market so assets, while others may charge a fixed investment adviser that the resulting price to the customer is fee for advice. RIAs may also charge fees you have selected, as favorable as possible under prevailing associated with the delivery of trade 3 confirmations or other trade processing that is a separately market conditions. fees to account holders. managed account. An important factor in determining whether the aggregate price to the customer is fair An RIA works for a company or partnership and reasonable is that the yield should be that is an investment manager. An RIA sells comparable to the yield on other securities advice, rather than selling securities. An of comparable quality, , RIA may be affiliated with a broker-dealer. rate and block size then available in the Some RIAs may charge an additional fee market. Reviewing the trading history of a for financial planning. The amount of an

3 On December 5, 2014, the SEC approved MSRB Rule G-18 and the related amendments with an effective date of December 7, 2015. The new effective date of MSRB Rule G-18 is March 21, 2016.

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Ways to Buy Municipal Bonds 3 adviser’s fees can affect the yield on your municipal bond portfolio at a lower cost investments, including municipal securities, than purchasing individual bonds. Investors depending on the environment generally receive the -exempt interest and the associated interest earnings.4 from such funds.

Engage in Direct Online Trading Although a municipal bond mutual fund Through a Self-Managed Account provides built-in diversity in municipal bond investing, you do not own those bonds Some investors may prefer a self-managed directly. Instead, you own an equity account, also known as direct online of the fund. This is important because trading, without the assistance of a private interest rate changes have a different client broker. This is an account held with effect on the owners of municipal bond Interest rate a broker-dealer, and generally charges the mutual funds than on the direct owners same commissions, mark-ups and mark- changes have a of municipal bonds. Many investors who downs associated with a regular brokerage different effect buy individual municipal bonds intend to, account with a broker-dealer. The firm on the owners of and do, hold them to maturity, although has the same obligations to investors as municipal bond the market value of bonds varies between any broker-dealer, but it may fulfill them purchase and maturity. But the managers mutual funds differently. For example, disclosure about of mutual funds are seeking to maintain than on the direct a particular bond might be electronic-only a stable or increasing share price. If rising owners of municipal without any discussion with a private client interest rates cause the market value of broker. A self-managed account requires bonds. bonds in the mutual fund portfolio to fall, the investor to understand the pros and some of those bonds will be sold — at a cons of each transaction. loss — both to limit further losses and to pay for share withdrawals. As a mutual fund Municipal Bond Mutual Fund shareholder, you are exposed to potential Another way investors can choose to fluctuations in the mutual fund’s value. participate in the municipal market is to buy shares in a mutual fund that is For an explanation of sales charges, fully or partially invested in municipal deferred sales charges, and various kinds of bonds. A mutual fund salesperson is shareholder and operating fees associated directly employed by a mutual fund (a with mutual funds see http://www.sec.gov/ registered investment company) or a answers/mffees.htm. group of affiliated funds. The mutual fund salesperson aids investors in buying or Municipal Bond Exchange Traded Fund selling mutual fund shares. Private client Municipal Bond Exchange Traded Funds brokers may also sell mutual fund shares (ETFs) are mutual funds that trade on a or they may be recommended by an RIA. exchange. Most municipal bond ETFs Full-time professional investment managers are designed to track an underlying index. select and monitor the quality When an investor buys or sells shares of a of the bonds held in a municipal bond municipal bond ETF, the transaction occurs mutual fund. Typically, participating in a between investors (buyers and sellers) mutual fund provides a naturally diversified

4 See http://www.sec.gov/investor/alerts/ib_fees_expenses.pdf to learn more about how fees and expenses affect your investment portfolio.

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Ways to Buy Municipal Bonds 4 over the exchange. In contrast, when an into the price of a municipal bond ETF investor buys or sells shares in a municipal that does not exist with a municipal bond bond mutual fund, the transaction occurs mutual fund. directly from the mutual fund company. Municipal bond ETFs trade during market For an explanation of sales charges, hours like a stock. Municipal bond mutual deferred sales charges, and various kinds of funds can only be bought or sold once a shareholder and operating fees, associated day. Because municipal bond ETFs trade with mutual funds see http://www.sec.gov/ like a stock, their share price can differ from answers/mffees.htm. the underlying (NAV) of the ETF. This can add another level of

Regardless of the method in which you participate in the municipal , consider your investment needs and ask your financial professional for written information about how fees are charged and which fees apply to your account.

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Ways to Buy Municipal Bonds 5