Municipal Bond Forum
Stung by fees
Q
I’d like to know what the common fee structure is when it comes to paying a broker to purchase municipal bonds. I just found your site and am not sure yet, but I may be able to buy bonds from your firm. Currently, I have about $1 million invested in muni bonds in the state of Ohio and pay a financial adviser to manage all my brokerage funds. If I had these funds in different stocks and mutual funds and was moving them around, I could agree with his fee structure. I am struggling with the fact that the majority of my investments are locked into long-term (7-10 years), low-risk bonds and I am paying his fees. With an approximate 5% return per year, I am paying almost .75% of that to the broker year after year in fees. In the next several years, I will have approximately $2 million more to invest in muni bonds. Is there a lower fee option?
A
James A. Klotz responds:
We are not proponents of professional management for municipal bonds.
Our 30 years of experience buying and selling tax-free bonds has taught us that individuals do not need a “bond manager” to build a bond portfolio that provides safety and a steady stream of tax-free income. In fact, we have never seen a managed bond account or bond mutual fund that, after accounting for fees and costs, has produced better results than simply buying and holding individual municipal bonds.
Like other brokerage firms, FMSbonds is in business to earn a profit. But we differ in our approach. We do not think you need us, or anyone else, to “manage” your bonds. Our approach is quite basic. We assist you with purchasing quality bonds that provide excellent tax-equivalent returns. Then we advise you to leave them alone. An individual continually buying and selling bonds in his portfolio is doing himself a disservice. This is what bond managers do. There may be situations that dictate selling a bond, but they are rare and should be based on common sense reasons that are easily understood by the investor.
Although a charge of .75% to manage your bonds may not appear significant, it becomes substantial in the context of a security that returns 5.00%. (.75% represents 15% of the income on a 5.00% bond)
As municipal bond dealers, we do not charge a commission. We make our money by buying bonds on the bid side of the market and selling to our clients on the offering side. All prices on our Web site are net to the investor. There are no additional fees or charges.
We also offer free safekeeping and custodial services at the Bank of New York, where our customer accounts are insured up to $25 million.
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The responses provided in this forum are meant to address specific questions posed by investors about their municipal bonds and to provide market insight for our general audience. Please note, your investments, objectives, results and experience may differ significantly. Our answers and any potential strategies discussed should not be construed as a solicitation to buy nor sell any security or investment product. All investing entails risk.