Brokers frequently lie to retail investors about municipal bond purchases, advisor Ric Edelman told an Securities and Exchange Commission forum on fixed-income securities Tuesday.
Edelman, who has been named by Barron’s as the top independent advisor in the nation in three of the last four years, said too often brokers make the following errors of omission and commission in dealing with would-be retail muni bond purchasers:
• Brokers frequently don’t tell retail investors they can negotiate for yield and spreads on muni bonds.
• Brokers also often don’t let a consumer know that a better price may be available from a competitor.
• Sometimes brokers tell a retail investor that the value of the bond is guaranteed, leading the consumer to think he or she can sell the bond at any time for the original purchase price.
“At end of day retail investors are being lied to," Edelman said.
Municipal Securities Rulemaking Board Executive Director Lynnette Kelly told the roundtable at the SEC’s Washington headquarters that the MSRB is studying whether to impose a best-execution rule for the municipal securities market.
She added the regulator may enhance its Electronic Market Access System (EMMA) municipal bond disclosure Web site by improving post-trade transparency and eventually pre-trade transparency.
The first step toward creating what she referred to as “EMMA 2.0” is having conversations about adding yield curves to the database.
SEC Chairman Mary Jo White said she is concerned retail investors are getting worse prices than they should be.
Echoing her worry that institutional investors have an unfair advantage in muni pricing, Commissioner Elisse Walter said, “The more I look at it, the more concern I have about fairness.”
Vanguard Group Fixed Income Group Head Robert Auwaerter cautioned that providing more information may not lead to gains for retail investors. “Pricing muni bonds art, not a science,” he said.
He added that one proposal, giving retail investors more up-to-date information from alternative trading systems, could be misleading because sometimes brokers will post low-ball bids and offers to try help to determine what the true market appetite is for a thinly traded municipal bond.
Retail investors directly hold about 50 percent of the U.S. $3.7 trillion municipal bonds outstanding and another 25 percent indirectly. The corporate debt market, which is much more heavily reliant on large investors, has a value close to $15 trillion.
Ric Edelman: Brokers Lying To Retail Muni-Bond Investors
April 17, 2013
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Comments
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I frequently speak at investor conferences on municipal bonds. I always address the pricing process. I tell the audience that 'everything is negotiable', there is usually a mark-up/mark-down. I show them the MSRB EMMA site and show them how to find pricing information. That said, ask yourself if a sales-person (shoes, food, computers, financial services,...) is always required to inform the customer that they may be able to buy the product for less at a competitor? Clearly, if an investor is told that the bond is guaranteed, this is probably a compliance issue. They are a few municipal bonds that are 'guaranteed' by another issuer through various credit enhancement agreements; but I don't believe Edelman is speaking to this. You sell more newspapers if you report bad news; you sell fewer if you report good news. Edelman is trying to sell more newspapers (his financial services) by saying bad things. Not really my most favorite sales tactic.
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The Retail Muni Bond Investor is a real optimist. With the efficient marketplace, the trader's desk, and the retail broker chipping at the deal, the investor must believe in Santa Clause and The Easter Bunny to think there is something left for him. It is a shock to know the brokers"lie" to investors. Sounds like standard procedure for Wall Street to me.
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Hey Edelman, tell the world that you mandate, you compel your employees to advise prospective clients that there are no-load alternatives to every fund you sell, that there are no-fee account arrangements that exist and that you don't feel comfortable investing some one's money until they assure you that they've exhausted all possible less-expensive options.
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Wow! He really is a great advocate of our the industry isn't he? Maybe he and Susie Orman should team up and write a book. It could be called the screwing of he investor by those in the know.
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I always thought Edelman was an egotistical self centered oddball. He is too stuck on himself. I can understand how bad it would be if one guarantees a bond they cannot guarantee. However, one can only go so far (putting a bond out for bid to various sources for example) to get best price they can. People can negotiate commission for stocks too. I hope they negotiate Edelman down on his annual fee too.
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OMG what a loser !! Did your car dealership tell you the smae car may be cheaper at another dealership? Did your golf store tellyou that new putter may be cheaper at another store? Did your grocery store tell you that possibly those oreos could be cheaper at a warehouse store? Are you kidding me?
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As a former Compliance Manager, Education is critical and if an advisor guarantees a bond value, then he just gave the client a wonderful "put" option. Advisors are responsible for knowing their product and educating the client. But, I am not sure if truly the typical small investor buying a municipal bond really has much "negotiating" capability as they buy in small lots. I think "lie" is a strong term, , but I think often those disclosures are not relevant to the small buyer in that transaction nor do such clients have multiple accounts in multiple places to shop around for the best bond price.
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I don't know when I last read such a sanctimonious, pious and self-righteous bunch of B.S. And to think, I used to admire this guy.
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What a joke. Edelman sells mutual funds not individual securities. How about questioning his self-serving crap? As for the best muni prices available? Well geniuses, what did you expect with the demise of proprietary trading by banks? They were the ones who put up capital to make markets in munis for retail investors to go to. Yep, another UNINTENDED CONSEQUENCE of our brilliant Washingtonians!!!! Or was it intended to give the regulators the next big thing for thier attorneys to get their hooks into?