RIAs and Bonds
Registered investment advisers work with the principals, the state (obligee), and surety authorities to buy and sell bonds. Majority of surveyed RIAs think that bonds will decrease in 2019 (45%). We have outlined our key findings below.
RIA Bond Buying Process
- Surety Bond Authority, a nationwide provider of bond services including court, construction bonds, surety and commercial bonds, discloses the following process for buying bonds:
1) The Registered Investment Advisor or investment adviser sends an application to Surety Bond Authority. Here is the registration packet for an investment adviser for the state of Pennsylvania.
2) Surety Bond Authority requests a list of required documents to qualify and register the investment adviser for the bond purchase. These include:
— RIA's credit score
— A copy of the Bond form
3) The application will be evaluated by an expert underwriter.
4) Once the application is approved, the bond is issued and sent to the registered investment adviser.
- Performance Surety Bonds also states that a RIA works with the following parties in buying and selling bonds: principals, the state (obligee), and surety authorities. The surety company provides protection in the case of fraud or bad investment advice due to dishonesty.
- The Municipal Securities Rulemaking Board (MSRB) outlines the same process for RIAs buying municipal bonds: "A registered investment adviser (RIA) manages accounts and makes purchases and sales in accordance with an investor’s agreed-upon strategy, without getting individual approval for each transaction."
- MSRB also states that RIAs choose and monitor the municipal bonds' credit quality. They may also participate and manage a mutual fund for municipal bonds than purchase individual bonds.
- While there is no data regarding where RIAs specifically find the bonds they purchase, Investopedia mentions the following general sources of bonds: TreasuryDirect for treasury bonds, banks, financial institutions with investment accounts or directly from the government.
RIA BOND SELLING PROCESS
- According to Financial Industry Regulatory Authority (FINRA), RIAs are responsible for managing accounts including buying and selling based on a previous agreement with the investor. Such transactions do not need individual approval.
- The RIA provides a written document that outlines the investment policy applicable to individual account as well as the investment method used by the adviser.
- FINRA notes that RIAs usually combine purchases for several clients at a time by trading larger blocks to attain a more desirable price.
- According to Financial Advisor's (FA) RIA Survey & Ranking 2018, the top primary custodians of RIAs are Charles Schwab (57.12%) and TD Ameritrade (27.5%).
- According to TD Ameritrade Institutional 2019 RIA Sentiment Survey, majority of surveyed RIAs think that bonds will decrease in 2019 (45%).
- The Advisor Authority Study 2019 reports that a major concern for RIAs this year is the rising pressure to sell products including bonds that might not be fit with clients.
- According to 2017 Evolution Revolution — A Profile of the Investment Adviser Profession report by the Investment Adviser Association (IAA), 60.1% focus their time on giving investment advice about securities including bonds, and nothing else.
- IAA reported that New York was the leading state for investment advisers in 2017 (2,359), followed by California (1,438) and Texas (652).
- The Investment Adviser Association (IAA) reported that 86.4% of RIAs reported no disciplinary history in their entire career.
We were unable to find the detailed process for Registered Investment Advisors (RIAs) buying and selling municipal or corporate bonds. However, we were able to provide a general overview of the buying and selling process of bonds as provided by surety authorities and FINRA. We found that the exact buying and selling process is not described by any of the official and trade organizations we researched including the Municipal Securities Rulemaking Board (MSRB), Surety Bond Authority, Financial Industry Regulatory Authority and others. No RIA agencies also provided a detailed step-by-step guide of the buying and selling process. However, the trade organizations we researched provided an overview of the buying and selling process for bonds in general, which we have provided above.
We also did not find any preexisting information on the details requested such as frequency of bond purchase, sources, types of bond purchases, pricing, and selling process. We implemented the following processes:
- Our first strategy was to look for firsthand information from RIA agencies and companies. We looked at corporate websites, blogs and other publications but found no detailed disclosure of their metrics and statistics regarding buying and selling of bonds. We also found no secondhand accounts of the buy and sell process from interviews of company officials and advisers. Instead, we found only invitations for inquiries for interested clients.
- Next we looked for professional profile studies of RIAs such as the 2017 Evolution Revolution — A Profile of the Investment Adviser Profession by the Investment Adviser Association (IAA) to see if these included statistics around bond product transactions including municipal and corporate bonds. No information on the topic was found as well; most of the data featured percentages on client type, compensation, custody of assets, and other general areas. Data on bonds were mostly lumped together with securities and other broader funds, with no specific data such as requested.
- Lastly we looked for proxy data points from recent RIA surveys and reports that could be used to triangulate the requested details. We looked into surveys including the RIA Survey & Ranking 2018, TD Ameritrade Institutional 2019 RIA Sentiment Survey and the 2019 Advisor Authority Study among others. We found no specific data on frequency of bond purchase, sources, types of bond purchases, pricing, and selling process; instead the data focused on RIA's general concerns, priorities and general statistics such as age, location and client types.
Therefore, we gathered all helpful data related to bond products from these sources and provided these as helpful findings above. We are presenting this as a partial client update as we have provided a general overview of the buying and selling process of bonds as described by surety authorities, Municipal Securities Rulemaking Board (MSRB), and Financial Industry Regulatory Authority (FINRA). We have outlined these and included all helpful findings from recent RIA surveys as well above.