How do you sell crappy bonds?

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Jun 22, 2010 2:53 pm

OK. This topic is a little tongue in cheek. But right now(and for some time) the jones inventory has been lousy. I tried to ask this question at our regional meeting(in a more acceptable manner) and got nothing. I don't see how we can solicit business using bonds at a premium price with small payouts. BG, are you around? You have had some great advice. How do you sell todays bonds to current clients who need income? And more importantly, how do you solicit prospects by phone with our current bond inventory?

Jun 22, 2010 5:23 pm

Plenty of good bonds to sell.  Man up and stop whining.  I sold the hell out of a 18yr AA 5% tax free today selling at par (only to new clients) why didn't you?

Jun 22, 2010 5:51 pm

Preacher, if you work at jones, you are full of BS. The best bonds we have today are 2017 CA  muni A at 3.9%, taxable A Citi 2037 at 5.9%. I haven't seen a 5% 18yr tax free in weeks.

Jun 22, 2010 6:11 pm

No, he's not.  It's a bond from IL.  5.05 coupon @ par.  Matures 8/1/2028.  Still $1.5 mil in inventory, so you can call on that tomorrow. 

Jun 22, 2010 6:28 pm

Thanks Spiff. I just found it. I don't know how I missed it earlier. I do a search at least a couple times a day.

Jun 22, 2010 8:12 pm

I hope your clients are happy to park their money for the next 18 years at 5%.  Interest rate risk alone on long-term bonds are scary enough to drive me away.

Jun 22, 2010 9:23 pm

Just call on the first one that pops up on the screen. if they don't like it tell them to come in so you can show them your other ideas since good rates are so few and far between.

Jun 23, 2010 1:07 pm

[quote=navet]

OK. This topic is a little tongue in cheek. But right now(and for some time) the jones inventory has been lousy. I tried to ask this question at our regional meeting(in a more acceptable manner) and got nothing. I don't see how we can solicit business using bonds at a premium price with small payouts. BG, are you around? You have had some great advice. How do you sell todays bonds to current clients who need income? And more importantly, how do you solicit prospects by phone with our current bond inventory?

[/quote]

Benefits of premium paper:

1. Higher rate of cash flow. This is a biggie for income buyers.

2. Higher rate of return when compared to equal risk/maturity discount or par bonds.

3. Less volatile. The higher coupon gives some level of protection against increasing int rates. For those worried about rates going up, you should be all over premium bonds.

4. Investor gets premium back in the form of cash flow.

Here's an example:

XYZ G.O  NR/AAA 5.50% coupon maturing 6/01/19 w/$15.00 priced 106.144, ytm 4.65%

Buy 100 bonds costs $106,144.00 plus AI. That 106k buys the client $5500 in tax free income every year.

A comparable investment would be to find a 4.65% bond at par. Buying 105 of those bonds for $105,000 gives the client a yearly income of $4882.50. Even if you could invest dollar for dollar the full 106k, the premium client comes out way ahead. In this example the client is getting a 12% income boost just for buying the premium.

And, by the way, the XYZ bond used in this example is a real bond from my inventory today.

Let clients know that premium bonds are for sophisicated income buyers. Tell'em " Most people, as well as most advisors, are afraid of them because they don't understand them. We're smarter than that. my job is to deliver the highest income i can to you within your stated risk tolerence. Premium paper is one of the best ways to do that."

Focus on cash flow.

As for the crappy sales credits, most firms have a collar within which the SC can be moved up or down. Don't go crazy, but for an investment to work it's got to work for not only the client, but the firm, and you as well. In my example i'm fine with a $15 SC for a 9 year hold, but as we get into long term, usually, I won't work for less than 2 points. If the numbers don't work for the client with two points cranked in, well it doesn't work for me either - move on find another piece.

Jun 23, 2010 1:06 pm

The issue is that I'm calling about products that I wouldn't buy myself. I'm calling in order to bring in business, for my own benefit. I know we BS ourselves that it's really about the client. But how much have we helped the client over the last 10 years. We produce or we're gone. The conflict of interest is becoming overpowering. Now, if you can show me the error of my ways, please do so. But I'm in a grump about this industry, particularly after our bullshit regional meeting, and I'm having second, third and twelfth thoughts about the value we provide.

Jun 23, 2010 1:26 pm

Where is the conflict of interest in selling bonds?  Are you thinking that Jones is getting some kind of revenue sharing stream from the bonds in our inventory? 

I think your comments about how much we have helped the clients over the last 10 years are a little, no, a lot short sighted.  Helping the client isn't always about investment returns or investor returns.  If you don't understand that, then you are absolutely in the wrong business. 

Why wouldn't you buy that bond I showed you yesterday?  Is it the 18 year maturity?  The rating?  The issuer?  The call features? 

I get the impression you're starting to live in some sort of investing fantasy world.  If you're expecting some sort of investing Panacea, then you're going to be looking for a long, long time. 

BG gave one of the best, and simplest, explanations of why a client should be looking at premium bonds instead of discount bonds, and you start blabbing about conflicts of interest. 

BG - Well done.  I remember Jones putting big piece out a few years ago on why we put premium bonds in our inventory.  They didn't do half as good a job as you did, and they wasted a lot more time and energy. 

Jun 23, 2010 1:54 pm

[quote=BondGuy]

[quote=navet]

OK. This topic is a little tongue in cheek. But right now(and for some time) the jones inventory has been lousy. I tried to ask this question at our regional meeting(in a more acceptable manner) and got nothing. I don't see how we can solicit business using bonds at a premium price with small payouts. BG, are you around? You have had some great advice. How do you sell todays bonds to current clients who need income? And more importantly, how do you solicit prospects by phone with our current bond inventory?

[/quote]

Benefits of premium paper:

1. Higher rate of cash flow. This is a biggie for income buyers.

2. Higher rate of return when compared to equal risk/maturity discount or par bonds.

3. Less volatile. The higher coupon gives some level of protection against increasing int rates. For those worried about rates going up, you should be all over premium bonds.

4. Investor gets premium back in the form of cash flow.

Here's an example:

XYZ G.O  NR/AAA 5.50% coupon maturing 6/01/19 w/$15.00 priced 106.144, ytm 4.65%

Buy 100 bonds costs $106,144.00 plus AI. That 106k buys the client $5500 in tax free income every year.

A comparable investment would be to find a 4.65% bond at par. Buying 105 of those bonds for $105,000 gives the client a yearly income of $4882.50. Even if you could invest dollar for dollar the full 106k, the premium client comes out way ahead. In this example the client is getting a 12% income boost just for buying the premium.

And, by the way, the XYZ bond used in this example is a real bond from my inventory today.

Let clients know that premium bonds are for sophisicated income buyers. Tell'em " Most people, as well as most advisors, are afraid of them because they don't understand them. We're smarter than that. my job is to deliver the highest income i can to you within your stated risk tolerence. Premium paper is one of the best ways to do that."

Focus on cash flow.

As for the crappy sales credits, most firms have a collar within which the SC can be moved up or down. Don't go crazy, but for an investment to work it's got to work for not only the client, but the firm, and you as well. In my example i'm fine with a $15 SC for a 9 year hold, but as we get into long term, usually, I won't work for less than 2 points. If the numbers don't work for the client with two points cranked in, well it doesn't work for me either - move on find another piece.

Thanks BG. I've learned more from you about bonds than I have in all my jones training. You do money management. We gather assets.

[/quote]

Jun 23, 2010 6:28 pm

[quote=Spaceman Spiff]

Where is the conflict of interest in selling bonds?  Are you thinking that Jones is getting some kind of revenue sharing stream from the bonds in our inventory?

[/quote]

 Yes. They all do. Bonds are marked up as they are put in inventories.

Navet - Bonds are used to start conversations or solve a need. If you do not know the client's need, it is irrelevant what the bond is you are calling about.

Jun 23, 2010 6:53 pm

I hear you ND. And I like the discourse that BG gave. Yet I have some issues with our methods. I call with the Oppenh./Rochester Nat'l muni fund. And it does get some response with it's 7.2% tax free payout. But it's a 1 star fund. Am I resorting to bait and switch methods to bring in assets? I don't mean to question all of your motives. But with this market, finding something to draw some exitement is difficult. And I find myself questioning the ethics.

Jun 23, 2010 7:42 pm

I don't know what else to tell you Navet. We have a great muni fund for my state and it basically sells itself. I wouldn't pitch anything else cold. Keep looking and you will find something that will work for you. Maybe look at ETFs that seek out dividends like SDY or DVY. Only you know what will work for you and your clients. We can give examples all day and there is nothing wrong with pitching the wrong item at first because guess what? Until the client opens their mouth to you, every product is wrong!

Jun 23, 2010 8:52 pm

[quote=navet]

The issue is that I'm calling about products that I wouldn't buy myself. I'm calling in order to bring in business, for my own benefit. I know we BS ourselves that it's really about the client. [/quote]

Wow! Sorry to be blunt ... I never sell ANYTHING I would not put in my Mothers account. It's not at all about the money for me at this point, I LOVE MY PRACTICE. I never bullshit myself and ALWAYS do my very best job for my clients.

You need to move on or get your head back in the right place. 

Jun 24, 2010 1:01 pm

[quote=BondGuy]

[quote=navet]

OK. This topic is a little tongue in cheek. But right now(and for some time) the jones inventory has been lousy. I tried to ask this question at our regional meeting(in a more acceptable manner) and got nothing. I don't see how we can solicit business using bonds at a premium price with small payouts. BG, are you around? You have had some great advice. How do you sell todays bonds to current clients who need income? And more importantly, how do you solicit prospects by phone with our current bond inventory?

[/quote]

Benefits of premium paper:

1. Higher rate of cash flow. This is a biggie for income buyers.

2. Higher rate of return when compared to equal risk/maturity discount or par bonds.

3. Less volatile. The higher coupon gives some level of protection against increasing int rates. For those worried about rates going up, you should be all over premium bonds.

4. Investor gets premium back in the form of cash flow.

Here's an example:

XYZ G.O  NR/AAA 5.50% coupon maturing 6/01/19 w/$15.00 priced 106.144, ytm 4.65%

Buy 100 bonds costs $106,144.00 plus AI. That 106k buys the client $5500 in tax free income every year.

A comparable investment would be to find a 4.65% bond at par. Buying 105 of those bonds for $105,000 gives the client a yearly income of $4882.50. Even if you could invest dollar for dollar the full 106k, the premium client comes out way ahead. In this example the client is getting a 12% income boost just for buying the premium.

And, by the way, the XYZ bond used in this example is a real bond from my inventory today.

Let clients know that premium bonds are for sophisicated income buyers. Tell'em " Most people, as well as most advisors, are afraid of them because they don't understand them. We're smarter than that. my job is to deliver the highest income i can to you within your stated risk tolerence. Premium paper is one of the best ways to do that."

Focus on cash flow.

As for the crappy sales credits, most firms have a collar within which the SC can be moved up or down. Don't go crazy, but for an investment to work it's got to work for not only the client, but the firm, and you as well. In my example i'm fine with a $15 SC for a 9 year hold, but as we get into long term, usually, I won't work for less than 2 points. If the numbers don't work for the client with two points cranked in, well it doesn't work for me either - move on find another piece.

[/quote]

Cushion Bonds. 

Jun 24, 2010 9:54 pm

just be careful about calls on premium bonds

Jun 24, 2010 11:35 pm

pitch the YTC, walk them thru it.

Jun 25, 2010 1:16 pm

Ice, yes, the 1 star rating concerns me. Now, I've been investing for over 30 years, but have been an FA for just over 2 years. I'm not too crazy about premium bonds, yet BG gives a compelling argument. If there is a hidden benefit to a 1 star rating, I would like to know what that is. Thanks

Jun 28, 2010 9:50 am

Ice, I couldn't have said it better myself.

The ORNAX fund isn't for everybody, but it certainly is an attention getter to get a conversation going. Which is why it's a good product for cold calling. Fact finding will determine suitability. By that time in the process you've got a conversation going and can move on from there. Whether or not the ORNAX fund is purchased, you've got a prospect and most likely a client. That you didn't shove the prospect into a non suitable investment builds the trust, and gives you credibility.

Navet, on the Star ratings - MorningStar loves people like you. But something to consider; a five star fund has only one way to go, and it's not up.

As Ice pointed out the ORNAX fund was a five star fund and for years the number one fund fund in its cat. In 2008 shortly before the fall, it was a four star fund. Guess what? All those stars didn't save it from  getting hit big time. A lot of unhappy star buyers in that one! Interestingly, the fund's non accrual rate or defaulted bond rate during it's five star period was about 5%. During the meltdown the rate was only 2%. It's climbed some since, but is still under 5%.

 Gee, higher return today with a lower default rate? I don't get it, what's with the lower Morningstar rating? Hmmm?

Buying a MF is no different than buying a money manager or for that matter anything else. It's about understanding what they do, how they do it, and why they do it. It's people and process. You shouldn't use any investment you don't understand. And clearly, you don't understand ORNAX.

Taking a deeper look at ORNAX requires talking with the managers and wholesalers. It's about understanding their philosophy. Which during the meltdown was, there is nothing wrong with us, it's the world that has gone crazy. And that's true. Also a point to be made is that with ORNAX  the scary part is their chosen marketplace, not the management of the fund. Digging deeper you find that they are an income fund. They aren't playing to the asset allocation crowd. Thus, they do everything they can to maintain and protect that income. Where, during the meltdown many other muni managers were out to save their own asses by selling high income bonds, shortening maturities,  and sacrificing income, ORNAX sat on it's hands. The result is that they are exactly the same fund today that they were before the meltdown.

Their actions in the face of absolute bedlam is commendable. They are exactly what i want in a manager. I want a manager who does what i hire him to do. In this case, that's to give me a high tax free income. Unfortunately, in this case, the market that manager operates within turned to shit. OK, not good! But if i want my clients out, that's my call not the manager's.  If the manager goes off the reservation making wholesale changes i no longer have good info on which to base a decision. That's beyond style drift. It's an absolute no-no!! You will never have that problem with ORNAX. They do what they say they are going to do.

The only decision to be made with ORNAX is can you live in the low rated-unrated world in which they operate?

And, BTW, they did lower the dividend in March or so of 2009. The fund was experiencing heavy INFLOWS and could no longer maintain its dividend because market conditions made it impossible to find enough bonds to satisfy demand. Apparently, not everyone bases  buy decisions on star ratings.