Advisors to Financial Advisors: Revisit Munis

Klotz on Bonds

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<h3>James A. Klotz</h3>

James A. Klotz

What are the advisors to the advisors saying right now?

“It’s time for financial advisors to revisit their municipal bond allocations.”

That’s from Financial Advisor, a news source for financial planners, registered investment advisors and independent broker-dealers.

FA cites the lucrative aspects of munis: “juicy” tax-exempt yields, “outstanding” credit quality and the ability to select bonds of various length.

What financial advisors are hearing from their advisors

Financial advisors told what’s right with munis

Unlike in the past, when financial advisors emphasized pretax returns, this year they’ve shifted their gaze to after-tax returns, according to FA. They’re focused on the tax-efficiency of municipal bonds and like what they see.

“I don’t know what happened behaviorally within the advisor universe that made them say, ‘Oh, wow, we should actually be looking at what the investors are keeping as opposed to what they’re making on paper with that pretax return,’” said Kevin Knowles, of Russell Investments, according to FA.

We would certainly agree. Veteran investors know that after-tax returns have always been the yardstick of value.

For example, for investors at a 40.8% tax rate, the recent, taxable equivalent yield on 30-year AA-rated insured municipal bonds is 6.15%.

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    Echoing what we’ve pointed out (“When Sellers Present Buyers With a Muni Opportunity”), the selloff early last year, fueled by fears over inflation and the Fed raising rates, set the stage for the higher yields we’re seeing today.

    “Last year, almost $120 billion was pulled out of muni mutual funds, which is a lot,” another investment professional told FA. “I think about 4% to 5% of the entire market. It’s a phenomenon that occurs in a retail-dominated market where clients start seeing red on their statements and start pulling money.”

    Compounding gains

    Yet another investment industry pro noted advantages for investors beyond immediate yield.

    “The most important point about municipal bonds is that they’re tax-free and compounded, and if it’s reinvested over and over, that’s great for the client,” he told FA. “Those end up being huge gains.”


    Value in experience

    What the insight advisors are sharing is accurate, but hopefully the news has reached individual investors long before now. The market phenomena they’re sharing has been discussed by us for at least a year.

    Success with municipal bonds doesn’t require a crystal ball or even a close reading of day-to-day headlines. Investors just need common sense and, when necessary, a little help from specialists who have participated in the muni market for decades and understand the particular nuances of bonds.

    This will put them in an ideal position to quickly capitalize on special opportunities that arise and follow a time-tested approach to maximize their steady stream of tax-free income.

    James A. Klotz is the President of FMSbonds, Inc.
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    Mar 8, 2023

    Please note that all investing entails risk. Fixed income securities are subject to risks that will affect their value prior to maturity. Some of these risks can be related to changes in market conditions, issuer creditworthiness, and interest rates. This commentary is not a recommendation to buy or sell a specific security. All references to tax-free income refer to U.S. federal income tax. Income earned by certain investors may be subject to the Alternative Minimum Tax (AMT), and or taxation by state and local authorities. Please consult with your tax professional prior to investing. For more information on these topics please click on the “Bond Basics” link below or search by keyword at the top of this page.