Not a question a lot of people ask, but it’s an important one. As an investor, if you buy a bond from your advisor or discount broker you see the price you are offered, but how far off is that from the price the brokerage paid to get it for you?
Bond desks can either be run as profit centres or not. When I was at ScotiaMcLeod and I wanted to buy a bond for a client, I would call up the bond desk downtown and get the price for what was in inventory and it was nice to know that our bond desk was NOT run as a profit centre. Ultimately it means the client gets a better price and therefore a better return on their money.
Some bond desks, however, are run as profit centres which means that the bond traders have to take their cut and management expects them to generate revenue for the firm as well as providing inventory to the salesforce (the advisors buying and selling bonds for clients). This revenue ultimately comes out of the end investor’s pocket.
An investor who uses a brokerage whose bond desk is run as a profit centre might get a bond at 95 whereas that identical bond sold through a brokerage whose bond desk is not run as a profit centre would get that bond at a price less than 95. This is independent of the commission paid to the advisor which is a separate consideration.
I’m going to guess that this is not a question that many people think to ask a potential new advisor, but I think it is an important one.
If I ask this question to an advisor, how likely is he to know the answer?
They may not know the answer off-hand, but they should be able to get you an answer within a day (their branch manager will know). I would say that if they do know off-hand, they are probably sharper than average, but if they don’t know off-hand it doesn’t necessarily mean they are below average as it is not something that gets discussed often.
Poor Bond traders at TDW become Investment Advisers and good bond traders at RBC become Hedge fund managers.
I stumbled onto this post when I was googling something else and couldn’t resist commenting since I’ve read your blog before.
Just because Scotia’s bond desk is run as cost centre, doesn’t mean that the pricing is better than a firm whose retail desk is a profit centre. I have dealt with many retail desks on the street and am well versed in their function.
The odds are that the same amount of spread is taken, regardless of the desk setup. The only thing that changes is who gets the spread. Is it 100% institutional, 100% retail, or a split.
It is also easier for an investment advisor to negotiate better pricing on a profit centre desk and the desk is capable of being more accommodating with bidding back product or correcting errors.
Thanks iGuru, further to that a bond desk that is run as a profit centre might be more competitive as they may be more aggressive on pricing as they have a vested interest in doing so. If a cost centre just cares about providing inventory they may sacrifice price in order to do so since they do not have a vested interested in the pricing.