Compared to the highly centralized and automated stock market, the bond market continues to rely on a heavy blend of human interaction in the form of bond brokers who consummate buy and sell transactions. Bond brokers act as intermediaries between bond investors and issuers and between bond investors. If you decide that you want to own an individual bond, you will have to choose a bond broker.
Bond brokers must pass a licensing exam and register with the Financial Industry Regulatory Authority (FINRA) to practice buying and selling bonds for individual investors and institutions. Some other titles used by professionals include stockbroker, account executive, and registered representative and financial advisor.
Brokers may operate independently or work for bond companies. The level of services and inventory of bonds vary between brokers. Most investors buy or sell bonds through discount brokers or full-service brokers.
Discount Brokers: Many investors who have the ability to conduct their own research and make buy and sell decisions independently choose discount brokers. Discount brokers carry out buy and sell orders for clients. Most discount brokers do not offer investment advice or hold a large supply of bonds. Discount brokers buy bonds from issuers or full service brokerage houses. They add a markup and sell the bonds to clients.
Full-Service Brokers: Many beginning bond investors and individuals who prefer professional research and guidance select full-service brokers to execute buy, sell orders for their portfolios. Full-service brokers offer clients a range of investment services, including professional research, investment strategies, and investment opportunities. Most full-service brokerage houses have an extensive inventory of bonds to offer investors.
Online Brokers: Bond investors can open an account online and conduct their investing activities over the Internet with discount brokers or full-service brokers. Although services differ between online brokers, investors can compare bond products between numerous bond dealers, investigate types of bonds and conduct bond research. The U.S Treasury offers investors the ability to buy savings bonds and Treasuries at no cost on the U.S. Treasury website.
Other Brokers: Independent brokers do not carry their own supply of bonds. They represent individual investors and bid on bonds held by bond dealers. Many banks have in-house registered representatives who help customers invest in bonds.
Evaluation Broker Services
When evaluating the financial professionals/brokerage houses, identify a broker has the professional competency—a combination education, experience and credential. Make sure the person has an active license with the U.S. Securities and Exchange Commission and the Financial Industry Regulatory Authority. Verify the broker has a license to work in your state.
The Securities Industry and Financial Markets Association website recommends investors consider the following items when evaluating brokers:
- Inventory of bonds– One you determine the type of bonds in which you want to invest, whether municipal bonds, Treasuries, corporate or other bonds, make sure your broker has access to those instruments.
- Broker background – Check the broker’s background to determine the person if has any disciplinary action taken, go to FINRA’s Broker Check services. You can also check your state regulator for information about firms and representatives.
- Personal confidence – Find a bond broker that engenders your complete confidence as it relates to knowledge about the bond market and the individual’s level of professionalism.
Interview and compare bond brokers, as you would evaluate other professionals. When interviewing candidates, frame your questions around the following factors:
- Length of time as a bond broker
- Experience buying and selling the types of bonds you intend to add to your portfolio
- Bond prices, transaction costs and commissions
- Reference you can contact
Remember, some brokers purchase bonds from dealers and markup bond prices, which increase your transaction costs. When interviewing brokers, record answers of candidates to make comparisons later to choose a bond broker. Pay attention to how a broker communicates and ascertain, as much as possible, which broker can help you accomplish you financial objectives.