How To Talk to Clients About Investing in Bonds

Advice to help financial advisors cover all the bond basics with clients

Fact checked by Suzanne KvilhaugReviewed by JeFreda R. BrownFact checked by Suzanne KvilhaugReviewed by JeFreda R. Brown

While you probably don’t jump to bonds when considering exciting investment opportunities, bond rates are much higher today than they have been in recent years and they’re generating a renewed interest in the market. Some of your clients will likely be curious and ask questions about whether or how to include bonds in their investment portfolios. 

This article and the downloadable guide linked below can help you prepare for such conversations and answer clients’ questions about investing in bonds.

Download: Client-Advisor Discussion Guide: Should I Invest in Bonds?

Key Takeaways

• Understanding your client’s financial situation, risk tolerance, and goals will help you show how a bond may help them reach their goals.
• Consider using a pre-meeting questionnaire to help guide client education and conversations about bonds.
• Ensure clients are clear on the risks associated with bond investing, but be prepared to show them how other investments mitigate those risks inside their portfolio. 
• Prepare example portfolio models ahead of time to show your client how bonds add diversification, risk mitigation, and capital preservation. 

Client: “​​How Do Bonds Fit Into My Portfolio?”

Since your client completed a pre-meeting questionnaire detailing their current assets, liabilities, timeline, and risk tolerance, this question can guide a conversation on adjusting their portfolio towards capital preservation as they approach the timeframe for their goals. 

Most clients need a firm grasp on portfolio diversification to have bonds make sense. This understanding is especially important when you present bonds with no liquidity or guarantees. No matter how good of a year bonds are having, they will not be nearly as attractive as a bull stock market. What are bonds about anyway? Why would your client benefit from bonds? That’s what they need to understand. 

As your client’s advisor, you have a fiduciary responsibility to ensure that they know bond risks. You can put their minds at ease by showing how the other investments in their portfolio mitigate those risks.

Tip

Investing is not about making as much money as possible. It is about ensuring your clients have money to fund their goals and don’t lose sleep getting there. 

One way to answer this question for your client is to create a model portfolio for them. This model portfolio and an explanation of why bonds exist can go a long way in clarifying for the client how bonds fit into their plan. 

Client: “Are There Other More Liquid Ways To Invest in Bonds?”

There is an ETF for everything these days, isn’t there? Liquidity concerns are legitimate, no matter the age of your client. Understandably, your more senior clients might not be thrilled about locking themselves into a long-term bond when they’re not even sure they will be locked into life as long as the bond lasts. 

The questionnaire your client filled out before the meeting can help decipher why your client is apprehensive about liquidity. Does your client have concerns about outliving the income they have access to? Do they worry about needing the money for future expenses like vacation or long-term care? Are they just wary of any money they don’t have under their mattress or can’t get their hands on in case of emergency?  

Whatever their reasoning, understanding liquidity concerns opens the door to bigger conversations. Additionally, as their advisor, these discussions allow you to problem-solve with necessary products and reallocations to offer peace of mind. You may find out that an ETF or mutual fund with bond holdings is better suited for your client, but you won’t know until you have a better idea of what they are comfortable with and what they want their money to do. 

Client: “If My Bond Defaults, Will I Be Repaid?”

When a client asks you to clarify what happens to their hard-earned money if the bond defaults, you need to be prepared to answer. In this instance, your client needs more information about bonds and their characteristics before you should proceed, period. 

Bonds come with trade-offs; some will be more palatable for your clients than others. You should ensure your client knows what is at stake when recommending any product. Bonds are no exception, even though they can seem complicated when casually dropping terms like yield-to-maturity vs. coupon rate.  

You don’t have to rehash the whole of your FINRA licensing exam to explain the bond market effectively. However, it would be best if you used this opportunity to discuss the types of bonds they can purchase, what entity owes them principal and interest, and how the safer the bond, the lower the yield. 

Once your client is clear on the characteristics of the different types of bonds, you can answer the question of what happens to their money if the bond defaults. Better yet, they will probably be able to answer it for themselves. 

Important

It’s essential for your clients need to understand the different types of bonds available and how the safer the bond, the lower the yield.

Client: “Is Now The Right Time To Buy Bonds?”

Think about why you are recommending bonds in the first place. You know that bond yields are having a moment in the sun right now, but we don’t buy bonds for their amazing yields, even in the best bond markets.  

Your client’s risk tolerance and goals are walking the dog here, not the bond rates. Clients interested in reducing portfolio risk and volatility don’t need to worry too much about the ebb and flow of the bond market. 

Now is a perfect time to show them a model portfolio that illustrates how the volatility calming, risk-return profile strengthening, and investment portfolio diversifying bonds can help meet their goals whether you add bonds today, next week, or even next year. 

The Bottom Line

Guiding clients through bond investing requires a thoughtful approach dictated by goals, timelines, and risk tolerance. Using tools like pre-meeting questionnaires and portfolio models, you can discuss and show clients how diversifying their portfolios with bonds can help them meet their financial objectives. 

When recommending bonds, ensure they fully understand the associated risks and address any concerns about liquidity or defaults. Ultimately, the goal is to build a portfolio that not only aligns with the client’s financial goals but also instills confidence in their ability to make well-informed decisions on what products will get them there.

Read the original article on Investopedia.