Bond Commissions Are Misunderstood
Bond commissions are a mystery to many investors, according to a study conducted for Charles Schwab. Though the overwhelming majority of survey respondents (98%) said receiving competitive pricing was either extremely or somewhat important, 44% did not know how much commission is in their broker-adjusted bond prices. Only 35% thought they received the best pricing from their brokers. Finally, 21% didn’t think the quoted bond prices included commissions.
A probable cause of the confusion is the way bonds are priced. Whereas commissions for stock trades are clearly posted on brokerage websites, bond commissions are not. Rather, brokerage firms mark up or mark down bond prices. Markups and markdowns adjust the bond prices to reflect the firm’s commission. In other words, instead of being charged a published commission of $7 to $10 per trade, as is the case with stocks, investors pay a fee that is based on the security’s price and fee.
Knowing what you will be charged typically requires a call to the broker. Charles Schwab’s website says no commissions are charged for Treasuries and $1 is charged per corporate and municipal bond (with a minimum $10 charge and a maximum $250 charge). Scottrade says it applies a markup and a markdown to Treasury and municipal bonds, while charging $35 plus $3 per bond for listed corporate bonds. TD Ameritrade charges $25 for Treasuries bought at auction. Commissions for all other bonds are billed on a net yield basis, which is the same as a markup or a markdown. Fidelity does not charge for Treasuries and lists a $1 per bond fee for corporate and municipal bonds, but states in fine print that its affiliate may separately mark the bonds up or down.
Given this pricing structure, it is not surprising that 93% of respondents thought understanding bond pricing was important, but around 40% said that it is too time-consuming or too complicated to find the best price.
If you invest in individual bonds, call various brokers and ask what their pricing structure is. In addition to any flat fee that is charged, ask how markups and markdowns are calculated. (If possible, give examples of bonds you might buy or sell.)