I have to admit that this website has been neglected. The fact is that I have been really busy with my new job to actually write an update. Earlier this year, I decided to leave my old employer and go work for another large multi-state bank. This time around, I am going to be managing a smaller team of analysts probably only four, but for now I am writing analysis myself and really enjoying going to work for a change. It makes a lot of difference when your opinion is valued instead of ignored, and it is refreshing not having to be responsible for other people’s work even if it is temporary.
The type of work that I am doing is slightly different, they are asking me to underwrite loans to very large companies as my new employer is more active in the syndication loan market. In a way, the job gets easier as there usually is ton of information about the borrowers and the industries available at that level.
Now that I have caught you up with what is going on with my work life, let’s talk about discount brokers and how important it is to do good due diligence about hidden costs. While you might think the topic is not related to the overall “commercial lending” theme of loanuniverse.com you will soon see why it is appropriate.
As I started the year in a new job, I found myself with a dilemma regarding what to do with my 401K. Since I had been with my previous employer for quite a while there was a substantial amount of money there. Being very much the independent investor, I decided to roll it over to a self-directed IRA. This way, I would not have anybody but myself if my returns were poor.
My plan was going to be somewhat conservative with the money and buy $50,000 in bonds and $50,000 in stocks. Over the years, I have had very positive returns by buying bonds of struggling companies that I think have either been unfairly punished by the market such as British Petroleum, or that are close to bankruptcy but with a projected recovery higher than the purchase price such as General Motors and CIT. This time around, I was not thinking of anything that aggressive for this money. My plan was to buy bonds of investment grade companies or just below investment grade. After all I have underwritten dozens of similar large companies and if anybody understands financial statements, and can read financial reports is me.
Since at that time, I had two discount brokerage accounts TD Ameritrade and Etrade it was just a matter of comparing both of them. When comparing discount brokers, concentrating in the fees is not enough. I figured both of them would give me access to the same stocks, but knowing that the bid/ask spread is significant in the bond market I decided to sample their prizes by running some queries. I really wasn’t expecting the results that I got. Let’s just say that Etrade consistently beat TDAmeritrade in price. The results below are typical of what I found.
First TD Ameritrade
Seeing a difference in yield of 0.20% to 0.30% was typical. On my planned $50,000 purchase that would have meant having to pay an additional $500 to buy the same amount of bonds face value, and anywhere from $100 to $150 less a year. At the end of the day, I decided to move the money to Etrade and actually close my TD Ameritrade account.
Disclaimer: My data points were collected in March 2013, and it was not inclusive of all bonds sold by those two brokers. It is possible, but unlikely that I might be wrong in my conclusion.
You can learn more about bond investing and investing in general by buying the following books from Amazon Bond Investing For Dummies, 2nd Edition and The Neatest Little Guide to Stock Market Investing: 2013 Edition