WASHINGTON – The Municipal Securities Rulemaking Board has published a new educational guide that walks retail investors through the pros and cons of varying methods of investing in municipal bonds.
The guide includes general information and considerations for investing through dealers, investment managers, direct online trading, muni mutual funds, and exchange traded funds.
The information follows a recommendation from the Securities and Exchange Commission in its 2012 Report on the Municipal Securities Market that said the SEC and MSRB "should consider initiatives to improve the understanding of retail investors as to the various ways in which they might buy or sell a municipal bond, and the relative advantages and disadvantages of each."
"This new guide is one of many free, objective education resources available from the MSRB for investors seeking to be more informed about their decision to buy or sell municipal securities," said MSRB executive director Lynnette Kelly.
The guide begins with five questions for investors to ask themselves, including how comfortable they are in making investment decisions, how much control they want over their own account, and what fee structure and trading frequency they prefer.
It then makes several suggestions based on possible answers to those questions before giving details about each possible choice an investor has.
If an investor knows he or she wants to trade infrequently and is looking for fixed income over a period of time, with a full return of principal, the MSRB said he or she could consider using a dealer that charges markups or commissions.
The guide explains to investors that dealers are required to: disclose all material information about any municipal security they sell; give the customer a fair and reasonable price; and only recommend securities that are suitable for the investor. It also distinguishes between dealers acting as principals who buy bonds for, or sell bonds from, their own accounts and charge markups and markdowns with those who act as agents on behalf of investors and charge commissions.
The guide informs investors that they will only see markups as part of the "all-in" price from principal transactions and reminds them to do their own research using EMMA to check if the yields they are receiving are comparable to other similar securities. The MSRB warns customers to ask questions if the yields they are getting seem out of line with those for comparable trades.
Other investors may want to utilize a registered investment advisor (RIA), which "sells advice, rather than selling securities," the MSRB said. Unlike dealers, RIAs have a fiduciary duty to act in an investor's best interest. An RIA makes purchases and sales in line with an agreed-upon strategy created after having discussions with the investor. An RIA often charges a management fee and may add other payments on top of that including processing and delivery of trade fees, the guide says.
A third option for investors seeking direct investments in muni bonds could be for them to trade through a self-managed account, the MSRB says. The accounts are held with a dealer, which generally charges the same commissions and markups as a regular brokerage account. The MSRB cautions that a self-managed account requires the investor to understand the pros and cons of each transaction.
For those investors interested in munis but not necessarily in directly investing in bonds, the MSRB guide includes information related to participation in mutual funds and ETFs that primarily hold munis.
The guide walks potential investors through the key attributes of a mutual fund and explains that while investing in a muni-focused mutual fund is often less expensive than simply investing in bonds, mutual fund investors do not own the munis the fund is invested in and may see fluctuations in the fund's value as the fund managers buy and sell fund holdings to stabilize or increase the share price.
Investors interested in shares of ETFs are encouraged to be aware that shares of ETFs trade like stocks. The share price can differ from the underlying net asset value of the ETF. That difference in value can add a level of volatility to muni bond ETFs that does not exist from investments in municipal bond mutual funds.
The MSRB guide concludes by reminding investors that "regardless of the method in which you participate in the municipal bond market, consider your investment needs and ask your financial professional for written information about how fees are charged and which fees apply to your account."
