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.