Views From The Experts

Peter Hayes
Head of BlackRock’s
Municipal Group

Why You Need To Lower Your Bond Costs (And How)

These are not simple times for financial advisors. Clients are expecting more, and regulatory scrutiny is rising. The burgeoning of disclosure requirements is changing the way advisors operate their businesses and how they invest client assets. Recently, the SEC approved rule amendments from the MSRB and FINRA that seek to provide greater transparency with respect to transaction costs on corporate, agency and municipal bond trades. Effective May 14, 2018, advisors will be required to disclose on retail clients’ trade confirmations the amount of the markup or markdown on certain principal transactions as determined from the prevailing market price of the security. When you consider that the average implied transaction cost on bonds is 145 basis points (1.45%), while equity trades average less than one basis point,1 this new disclosure is bound to result in some difficult client conversations for advisors who continue to trade bonds on an individual basis.

Anticipation of this requirement, coupled with relatively high transaction costs and the increasing difficulty of managing individual bonds due to diminishing dealer inventory and increased need for credit research, has compelled proactive advisors to shift their clients’ fixed income assets into managed strategies such as mutual funds, iBonds2 and separately managed accounts (SMAs). These investments allow advisors to benefit from the cost efficiency of large-scale institutional trading and, ultimately, demonstrate to clients that they are looking out for their best interest. Additionally, the time advisors can save by leveraging managed strategies can be better spent on growing their client base.

BlackRock can help simplify the process of transitioning your portfolio of individual bonds into managed strategies, and will even take your existing holdings in-kind when you choose a BlackRock SMA.3 To learn more about BlackRock’s Bond Buyer Program and its wide range of customizable taxable and municipal SMAs, contact us at 1-877-ASK-1BLK or www.blackrock.com/fixedincome.

These are the expressed views of BlackRock as of September 22, 2017 and are subject to change.

1 Source: S&P Dow Jones Indices “Unveiling the Hidden Cost of Retail Bond Buying & Selling,” August 2016. Reflects average implied transaction cost to retail investors as of June 2016. Indexes used were the S&P National AMT-Free Municipal Bond Index, the S&P Municipal Bond High Yield Index, the S&P U.S. Issued Investment Grade Corporate Bond Index and the S&P U.S. Issued High Yield Corporate Bond Index. Implied transaction cost for equities based on average per trade cost of $6.15 across the five largest discount brokers on a $100,000 trade.

2 iBonds are bond ETF solutions available through iShares by BlackRock.

3 Available to advisors with bond assets under management equal to or greater than $2 million.

BlackRock is a global leader in investment management, risk management and advisory services for institutional and retail clients. At June 30, 2017, BlackRock’s AUM was $5.68 trillion. BlackRock helps clients around the world meet their goals and overcome challenges with a range of products that include separate accounts, mutual funds, iShares® (exchange-traded funds), and other pooled investment vehicles. BlackRock also offers risk management, advisory and enterprise investment system services to a broad base of institutional investors through BlackRock Solutions.®