Here are some tips for kicking off conversations about bonds, based on some archetypal clients you likely have within your book.
1. You have clients who want more yield from fixed income, but aren’t keen on adding too much risk: “Have you considered municipal bonds, known as ‘munis’? Yields are higher than federal bonds and the risk level is still low.”
2. You have a wealthy, young client with an appetite for risk and a matching tolerance: “Since you have such a long time horizon, and you’re willing to take on a little extra risk, we should consider putting you in distressed bond funds, which are only available to wealthy investors like you.”
3. You buy individual government bonds for your client’s domestic bond exposure, but use mutual funds for U.S. and European corporate bond exposure. Your client asks why. “When you’re dealing with Canadian government bonds, you don’t need to look through the terms with a fine-toothed comb. But there are risks associated with corporate bonds that are difficult to pinpoint unless you spend hours reading the bond’s terms, known as a covenant. It takes a specialist to understand those documents, so we’re leaving that work to experts who do it for a living.”
4. Your client always hears TV commentators talking about higher bond yields hurting investors. She’s confused because common sense says higher yields are better for investors. Here’s how to explain what happens: “If you’re in the market to buy the bond, then yes, the higher yield is to your advantage because that’s what you’ll receive. But if you already own the bond and the current yield goes up, the face value of the bond you hold is worth less if you decide to sell. That’s because the buyer will demand the current market yield, which is higher than what you got when you bought the bond.”