Fidelity’s Message for Retail Bond Investors: Comparison Shop — it Can Make a Big Difference

Transaction Fees for the Same Bond Range from .01 Percent to 2 Percent or More

BOSTON – Bond investors could pay as much as $2,000 in transaction fees for their purchase of bonds worth $100,000, or they could pay as little as $100 for that same purchase depending on where they choose to do businessi.

“Shopping for bond prices should be no different than comparison shopping for the best deal on a car, TV or other big-ticket item,” said Ram Subramaniam, president of Fidelity’s retail brokerage business. “Bond prices - whether for corporate or municipal (muni) - vary widely, so retail investors should ensure they take the time to comparison shop, as it can save them thousands of dollars and, in turn, improve the bond’s yield. The general lack of transparency in this market means investors can be disadvantaged if they are not careful shoppers.”

Unlike equity markets, which are liquid and enjoy pricing transparency, bond markets have not historically had a continuous two-way market of buyers and sellers, and bond transaction fees at many brokerage firms can be hard to decipher.

Transaction fees are as low as 0.01 percent, or as high as 2 percent or even higher of a bond’s face value. Brokerage firms charge transaction fees in one of two ways:

• A fee clearly stated as separate from the offered price of a bond
• A markup fee that is bundled with the price of the bond

Markup fees can make it difficult for retail investors to know the real price of the bond versus how much is going to their brokerage firm.

“Understanding bond transaction fees and being able to find the lowest markup is very important, particularly in today’s low-interest environment,” said Subramaniam. ”If you’re buying a bond that yields 3 percent and are charged a 1 or 2 percent markup, you’re going to erase $10 or $20 from your first year’s income of $30 from the bond.”

Lower Bond Pricing Can Equal Significant Savings
Fidelity Investments® teamed up with industry research firm Corporate Insightii and commissioned them to study bond pricing for retail investors from five selected commission and markup-based firmsiii providing access to corporate and muni bonds trading in the secondary marketiv. Corporate Insight is the leading provider of competitive intelligence to U.S. brokerage firms. The study compared Fidelity’s prices vs. competitors’v for over 6,000 unique muni and corporate CUSIPs (a unique identifier for the bond showing the company or issuer and the type of bond) and 10,000 bond offerings of the same CUSIPs from March 25 -28, 2013.

The study found that Fidelity, which charges a flat $1 per bond transaction feevi, was less expensive 98.6 percentvii of the time versus “markup-based” brokers that bundle transaction fees with the price of the bond. The study compared Fidelity to markup-based brokers, and on average these competitors had charged $15.47 more per bondviii . For a hypothetical Fidelity customer who invests/reinvests $100,000 in face value of bonds per year, that would have been an average annual savings of $1,547, and for a customer investing $500,000, that would have been a savings of $7,735.

Fidelity charges markups on secondary bond offerings from Fidelity Capital Markets (FCM), the institutional trading arm of Fidelity Investments. Bonds from FCM are treated on a par with bond offerings from third-party broker dealers. For example, the default view in the Depth of Book tool on Fidelity.com shows the lowest priced offering on top, so if FCM’s price is higher than a third-party broker dealer, it is shown lower down the display. Other offering brokers of bonds traded through Fidelity may separately mark up or mark down the price of the security and investors may realize a trading profit or loss on the transaction.

A Large Bond Inventory Can Equal More Choice
In addition to price, investors should ask themselves if their brokerage firm has the variety and quantity of corporates and munis to give them an acceptable range of options. Also understand if their firm offers bond research and screener tools to narrow the thousands of bonds to their individual needs and fixed income specialists available to assist with those choices. Corporate Insight observed that Fidelity had offered access to 285 percent more total corporate and muni bond CUSIPs on average on Fidelity.com than its markup-based competitors did on their websites during the review periodix.

“Fidelity aggregates one of the largest bond inventories available, from multiple providers, creating in essence a virtual marketplace,” said Subramaniam. “This encourages competition among dealers to offer the lowest price on a particular bond.

“When comparison shopping, it’s important for bond investors to look at the overall value proposition of a brokerage firm, including price, choice and service,” continued Subramaniam.

Fidelity encourages investors to take three steps before making their next bond purchase whether online or through a phone representative:

1. Check to make sure your brokerage firm has a sufficient amount of bond inventory, and is displaying an aggregated inventory from multiple dealers

2. Compare prices of a specific bond CUSIP across multiple firms’ websites

3. Ask if your firm has the level of fixed income service and support when you need it, and the online tools to help with your bond investing

Fidelity’s Bond Investing Resources
Fidelity is a leader in bond market transparency, having introduced the Open Bond Market in 2004. It has continually released new online tools such as the Bond Ladder Tool and the Yield Table; bond education including webinars on the Fidelity Learning Center; and institutional-quality research on the Fixed Income & Bond Markets home page.

The firm recently published several Fidelity Viewpoints® to help investors navigate the bond market, including “Investing in a Volatile Bond Market” and “Four Tips for Bond Investors.” Among the Viewpoints’ primary educational objectives is to inform investors that fixed income securities carry interest rate risk and that interest rate movements will almost always have an impact on bond prices. For example, as interest rates rise, the price of existing bonds typically falls. Investors that decide to sell their bonds in this type of interest rate environment will likely get less than they originally paid for the bonds and this loss will be greater for longer-term bonds and usually declines as the maturity date gets closer.

Investors may also want to consider bond funds as a convenient way to gain exposure to the bond market. Fidelity offers more than 2,800 bond funds on Fidelity.com.

For further guidance, qualifying investors have access to fixed income specialists at 1-800-Fidelity and all investors are welcome to visit one of Fidelity’s 182 investor centers nationwide.

About Fidelity Investments
Fidelity Investments is one of the world’s largest providers of financial services, with assets under administration of $4.3 trillion, including managed assets of $1.8 trillion, as of July 31, 2013. Founded in 1946, the firm is a leading provider of investment management, retirement planning, portfolio guidance, brokerage, benefits outsourcing and many other financial products and services to more than 20 million individuals and institutions, as well as through 5,000 financial intermediary firms. For more information about Fidelity Investments, visit www.fidelity.com.

i This is the difference between a firm, such as Fidelity, charging $1 per bond (or .01%) and one charging as much as $20 (or 2%) or higher per bond on a 10-bond purchase that Corporate Insight found markup-based brokers were frequently charging during the study’s period of evaluation (March 25 – 28, 2013). Year to date, as of Sept. 18, 2013, Fidelity’s retail brokerage account holders who purchased an individual bond, purchased on average 41 bonds per transaction, with a net purchase amount of 208 bonds per account on average.
ii Clicking this link will bring you to the Corporate Insight Web site, which is unaffiliated with Fidelity.
iii Firms included Fidelity, Charles Schwab, TD Ameritrade, Merrill Lynch and Wells Fargo Advisors
iv The study was conducted March 25 - 28, 2013
v Selected competitors included commission-based firm Charles Schwab and markup-based firms TD Ameritrade, Merrill Lynch and Wells Fargo Advisors
vi Minimum concessions apply: Online $8; if traded with a Fidelity representative, $19.95. For US Treasuries traded with a Fidelity representative, $19.95 per trade. Fixed income trading requires a Fidelity brokerage account with a minimum opening balance of $2,500. Rates are for U.S. Dollar-denominated bonds, additional fees and minimums apply for non-Dollar bond trades. Other conditions may apply. See Fidelity.com/commissions for details. Please note that concessions may impact the total cost of the transaction and the total, or “effective,” yield of your investment. The offering broker may separately mark up or mark down the price of the security and may realize a trading profit or loss on the transaction.
vii Percentage of incidence of a lower cost offering at Fidelity calculated by comparing the lowest available price to the investor of a given CUSIP offered on Fidelity.com vs. markup-based competitors, at the same point in time. The number 98.6% is the average incidence of Fidelity’s price “wins” compared to the markup-based brokers included in the study.
viii Corporate Insight determined the average cost differential by calculating the difference between the costs of matching corporate and muni bond inventory at Fidelity vs. the markup-based firms in the Study, then averaging the differences across all of the competitor firms.
ix Corporate Insight defined the bond inventory as unique CUSIPs offered within a defined universe. For Corporate bonds the study used all bonds offered by the following issuers: Bank of America, Berkshire Hathaway, Caterpillar, General Electric, Goldman Sachs, Time Warner, Verizon, and Wal-Mart. For the municipal bond universe the study used all bonds offered from the following States: California, Florida, Illinois, Massachusetts, New Jersey, New York, Ohio, Texas

Investing involves risk, including risk of loss.

In general the bond market is volatile, and fixed income securities carry interest rate risk. (As interest rates rise, bond prices usually fall, and vice versa. This effect is usually more pronounced for longer-term securities.) Fixed income securities also carry inflation risk, liquidity risk, call risk and credit and default risks for both issuers and counterparties. Unlike individual bonds, most bond funds do not have a maturity date, so avoiding losses caused by price volatility by holding them until maturity is not possible.

The municipal market can be affected by adverse tax, legislative or political changes and the financial condition of the issuers of municipal securities.

Fidelity, Fidelity Investments, Fidelity Viewpoints and Fidelity Investments and the Pyramid Design logo are registered service marks of FMR LLC.

The third party trademarks appearing herein are the property of their respective owners.

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