Brokers and Other Financial Professionals - dummies

Brokers and Other Financial Professionals

By Russell Wild

If you want to invest in individual bonds, the first thing you need is a reliable broker or dealer — a person or institution to place the actual trades for you.

Many bond dealers are traders or brokers who buy a bond from Client A at one price, sell it to Client B at another, leave the office for a few rounds of golf, and then come back to harvest more profits.

Some bond dealers are very knowledgeable about fixed-income investing and can help walk you through the maze, making good suggestions for your portfolio. Some are very talented at finding the best buys in bonds and using certain sophisticated strategies to juice your fixed-income returns.

Unfortunately, the way dealers are paid creates a system where the traditional dealer’s financial interests are in opposition to the interests of his clients. The more the dealer makes, the less the client keeps. The more the client keeps, the less the dealer makes.

The more the dealer can get you to flip, or trade one bond for another, the more the dealer makes. Generally, the more you flip, the less likely you are to come out ahead.

The bond trader who acts as principal (taking ownership of the bond) is not required to reveal what kind of markup he is making. And you won’t find this information in Consumer Reports. (Fortunately, though, you can find it on TRACE. TRACE is a system run by the Financial Industry Regulatory Authority (FINRA) that can be accessed through many financial websites, such as

Some bond dealers today work as agents and charge you a flat fee, an hourly rate, a certain amount per trade, or a percentage of assets under management. A good agent, like a good broker, may know the ropes of bond trading well enough to help you make the best selections and get the best prices.

Agents, unlike brokers, do have to reveal exactly what they are charging you. Alas, whereas an agent is generally better to deal with than a broker (simply because the conflict of financial interest doesn’t exist), a good one is very hard to find. And even if you do find one, agents often must work with dealers to get trades done.