Another Look At Muni Bonds

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January 16, 2012

Another Look At Muni Bonds

Financial advisors typically evaluate the maturities, call features and credit quality of clients’ municipal bond portfolios. But advisors could build business and cement relationships by seeing if the bonds are in line with their clients’ social values, says Harris May, president of Strategic Partners Investment Advisors, a fee-based money manager with $400 million in AUM that specialized in managing muni bond portfolios.

Even financial advisors who focus on socially responsible investing can find muni bonds in portfolios they manage that don’t support their clients’ values, says May, whose Rye Brook-N.Y. firm is a sub manager to SRI municipal bond portfolios on platforms for Envestnet and First Affirmative Financial Network. May has met with SRI financial advisors all over the country and found many aren’t familiar enough with projects being funded by muni bonds and how they mesh with client values.

“For example some municipal bonds are secured by alcoholic beverage taxes, legalized gaming taxes and payments from the tobacco settlement agreement. The state of Florida issues bonds that are backed by lottery taxes,” May says. “In addition, some municipal bonds are issued to support and construct nuclear power plants, prisons, hospitals that perform abortions and for stem cell research. The state of California issued hundreds of millions of bonds for stem cell research.”

Some investors who invest according to social values may want these bonds in their portfolios while others may not. But it’s important for SRI advisors to know the projects being funded by municipal bonds so they don’t end up embarrassed if a client asks for a review, maintains May.

He adds such knowledge can also help financial advisors build new business that comes through other professionals. He noted some planners bring in business to their firms by working with accountants, especially on municipal bond portfolios. An accountant might review a client’s muni bonds to see how they are impacting tax liability and AMT status, but then refer the client to a financial advisor to evaluate the bonds’ maturities, call features and credit quality. The advisor could also be assessing whether any of the holdings violate the client’s social values, says May.

He adds the universe of municipal bonds is so vast that restructuring municipal bond holdings to reflect a client’s social values won’t hurt performance.

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