Regular Main Street investors plowed a ton of money into municipal bond funds between 2009 and 2013 - $915 billion in all, according to The Wall Street Journal.
But in doing so, they’re paying more in investment fees than they are for other major assets classes, including corporate bonds and stocks.
“Investors who put cash into municipal bonds—a widely popular strategy for those seeking safe, tax-free bets—are paying about twice as much in trading commissions as they would for corporate bonds,” says The Journal.
Why the big markups in the municipal bond market? A big part of the reason is that federal regulators haven’t exactly shone a bright light on the muni bond market, even though regular mom and pop investors are the biggest investors in the $3.7 trillion market. (Retail investors love the safe, fixed rates of return on muni bonds, as capital preservation, with some return, is a big priority for average investors.) Individual investors own about 73% of all municipal bonds, industry data shows.
But minimal regulatory oversight has enabled municipal bond brokers to rake in huge profits on the backs of retail investors.
Muni bond investors pay, on average, a fee of 1.73% on their municipal bond investment, compared to 0.87% for a comparable corporate bond valued at $100,000, according to The Wall Street Journal.
Some relief from high markups on municipal bonds appears to be on the way, as U.S. regulators finally ramp up efforts to better track bond market fees(EMBED: http://blogs.wsj.com/totalreturn/2015/01/14/dont-let-muni-bond-markups-sap-your-returns/).
In the meantime, there are several actionable steps that municipal bond investors can take to get educated and mitigate high fees:
Do your homework - The Electronic Municipal Market Access web site (or “Emma”) tracks municipal issuers’ disclosures, documents, trade data and other information. Visit the website and search for any municipal securities that you’re considering purchasing to find out exactly what you can expect to pay in fees.
Consider a fund - Be wary of individual municipal bonds, as these can eat into returns more than municipal bond funds (which offer smaller markups, industry data reveals). A fund allows you to bypass higher fees and diversify your investment portfolio. Some good fund options to consider are Fidelity Intermediate Municipal Income Fund, the T. Rowe Price Summit Municipal Intermediate Fund and the Vanguard Intermediate-Term Tax-Exempt Fund.
Watch new developments – The MSRB and the Financial Industry Regulatory Authority are rolling out new rules on municipal bond funds that would make brokers disclose the price they paid for a specific municipal bond investment (for all municipal bonds valued at $100,000 or less.) While those rules should come out this year, you may want to wait to see what brokers are paying, and then charging you, for the same municipal bond investment. As we've discussed before, high fees on investment products are only part of the problem. The bigger problem for retail investors is that even when investment vehicles are subject to more rigorous regulatory requirements, the financial institutions have perfected the fine art of creating fee structures that are so confusing that investors give up on finding out how much they pay in fees.
You don’t have to take these fees lying down. To avoid high markups on muni bonds, contact your broker and ask if you can get a better deal on municipal bond fees (you can often get a break if you’re a regular customer, and you’ll never know if you don’t ask).
It’s just up to you to take action and get a better deal on your municipal bond investments. There are better options than getting fleeced by brokers.