According to a new study released today by Charles Schwab, consumers are far less likely to shop around for financial products than for household products such as TVs and appliances and the disparity is striking when it comes to buying bonds. Even among the 61% self-described bargain hunters, most of whom know that pricing on financial products vary greatly, confusion and inertia overcome the desire to get the best deal when buying bonds: while 51% will shop around for the best price on a gas grill, only 17% will do the same for a bond. “In this low interest rate environment, consumers are hungering for yield. The more you pay for a given bond, the less yield you’ll earn on it,” said Peter Crawford, senior vice president at Charles Schwab. “The majority of retail investors are informed shoppers and know that bond pricing varies a lot from firm to firm, yet very few of them take the time to shop around. Our message is simple: investors shouldn’t feel resigned to pay blindly for bonds.” Bargain Hunting For Bonds: How Investors Shop is a Charles Schwab study that explores the mindset and behavior of individual investors when shopping for consumer goods and financial products, with an in-depth look at attitudes towards bond buying. The online survey conducted by Koski Research was completed by 514 individual investors in the U.S. with a minimum of $100,000 in total investable assets. The study took place from May 16 to June 1, 2013. Comparison Shop ‘Til They Drop When shopping for household products and consumer goods, our survey indicates that investors are committed to finding a good deal. Study respondents say they are extremely likely to compare prices for cars (80 percent), airline tickets (77 percent), HD TVs (71 percent) and gas grills (51 percent). More than 90 percent of investors are confident in their ability to find the best price for these items.
When making household purchases over $1,000, 63 percent of investors surveyed believe it is extremely important to find the best price. A large majority (82 percent) say they do extensive research before making a buying decision, with 88 percent saying they collect three or more prices for comparison, and 65 percent saying their research spans a few days or even weeks.Barbecues vs. Bonds: A Dichotomy Despite their bargain hunter ways, our survey indicates that investors aren’t as likely to search for the best deal when it comes to financial products. The contrast is particularly striking when it comes to buying bonds. Fifty-five percent of study respondents say they are extremely likely to shop around for mortgages, 48 percent and 39 percent say the same about credit cards and auto insurance, respectively; yet only 17 percent are extremely likely to shop around for bonds. “Fewer than one in five investors shop around for bonds, which we think has less to do with investor behavior and more to do with industry barriers that get in the way of investors’ interests,” said Crawford. “There is no industry standard for how bond prices are marked up, and as a result investors are unclear about how much bonds cost and uncertain about how to shop for the best prices.” How Much is That Bond in the Window? According to a July 2013 Patpatia & Associates, Inc. study on fixed income marketing, pricing and support practices 1, bond investors can pay mark-ups of up to $21 per bond at some brokerage firms, compared to just $1 per bond transaction cost for most on-line secondary trades at Schwab. Hypothetically, this $20 price difference would reduce the yield earned on a 4%, semi-annual paying, 10-year bond by .25%. “Every basis point counts,” said Crawford. “By getting the lowest price on a given bond, investors can increase their yield.”
According to the Schwab study, fifty-four percent of investors believe bond prices vary from broker to broker; and 94% of that group believes prices vary moderately or a lot.So why aren’t these investors shopping around? Schwab’s study found that:
- More than half (53 percent) of investors say they do not know how to get the best price on bonds;
- 43% say it is too complicated to comparison shop for bonds and 47% say it is too hard to see what a bond costs.
- Ask your broker how he or she is compensated on your bond purchase, and make sure you understand any commissions or mark-ups built into the price (or yield) as well as any additional fees. Unless your broker has a standard mark-up policy, you should ask before every trade.
- Shop around: compare bonds as well as prices. Just like prices for the same bond can vary from brokerage firm to brokerage firm, so can availability. Is your firm able to shop around on your behalf to find the best available bond for your needs, or do they focus on what they have in their own inventory? Doing a little homework to find the right bond and the right price can really pay off.
- Tap into education: take advantage of industry resources, like SIFMA’s investinginbonds.com.
Schwab’s BondSource® offers access to over 36,000 new issue and secondary bond offerings from more than 200 dealers 2, connecting investors to multiple major bond trading platforms, not just one. Schwab’s online platform offers clients access to professional research and user-friendly bond search and filter functionality. Bond investors are automatically presented with the lowest price available to Schwab for a bond, and can easily cross-check that price against others Schwab has received for the same bond by searching for the CUSIP on Schwab BondSource. All clients have access to Schwab’s experienced, dedicated team of 100 fixed income specialists 3 who can provide further guidance.About Bargain Hunting For Bonds: How Investors Shop The Bargain Hunting For Bonds: How Investors Shop was an online survey of U.S. investors conducted by Koski Research for Charles Schwab. The study has a 4.4 percent margin of error at the 95% confidence level. A total of 514 respondents completed interviews. Survey respondents had a minimum of $100,000 in total investable assets, ranged in age between 25 and 75, do investing on their own and have heard of bonds or fixed income investments. Fifty-one percent of survey respondents own or have owned individual bonds. Survey respondents were not asked to indicate whether they had accounts with Charles Schwab. All data is self-reported by study participants and is not verified or validated. Investors participated in the study between May 16 and June 1, 2013. Detailed findings can be found at www.aboutschwab.com/press/research. About Charles Schwab At Charles Schwab we believe in the power of investing to help individuals create a better tomorrow. We have a history of challenging the status quo in our industry, innovating in ways that benefit investors and the advisors and employers who serve them, and championing our clients’ goals with passion and integrity.
1 Patpatia & Associates, Inc.’s 2013 Fixed Income Trading in Wealth Management study, released in July 2013, presents findings on the marketing, pricing & support services practices and policies for Fixed Income in the Wealth Management channel of over 15 firms across National Full-Service firms, Regional and Independent Broker-Dealers, and Discount Brokerage and Clearing firms. For more information, visit www.patpatia.com.2 As of December 2012 3 As of January 2013 Investing involves risk, including possible loss of principal. Koski Research is unaffiliated with the Charles Schwab Corporation and its affiliates. Patpatia & Associates, Inc. is unaffiliated with the Charles Schwab Corporation and its affiliates.