Municipal bond investors devote much analytical energy to assess credit quality and interest rate risk. Another crucial risk factor in realized returns may come from a different source: issuer behavior. How and when issuers refinance or redeem callable bonds can reshape expected cash flows. As a result, two bonds with similar structures can deliver meaningfully different realized returns depending on how actively issuers manage their debt.
Why are some bonds called at the first opportunity when rates fall, while others remain outstanding for years? Why do bonds with similar coupons and call provisions behave differently across issuers in the same rate environment?
Part of the answer lies with the municipal financial advisor. Advisors do not directly set yields or trade bonds. But they influence how bonds are structured, disclosed, and, most importantly for investors, when and how issuers exercise their call options.
Legal, administrative, and financial analysis requirements around call decisions can be significant for issuers without centralized treasury desks, making call exercise uneven across issuers. Advisors help reduce these fixed costs.
For municipal bond investors and analysts, advisor involvement is a useful signal of call risk, reinvestment risk, and valuation.
Advisor Involvement as a Signal in Muni Bond Markets
Over the past two decades, financial advisors have become central players in the municipal market. Garrett and Malakar (2026) show that municipal financial advisors have become much more likely to be used in municipal bond issuance, increasing from 53.1% of the deals in 2000 to 81.7% of deals in 2024.
Patterns associated with advisor involvement are particularly relevant for investors: Refundings and redemptions occur sooner and more often.
Bonds issued with advisors are more likely to be redeemed earlier through current or advance refundings and show consistently higher redemption rates around the call date. For bonds issued between 2000–2004, advised bonds exhibit faster exercise of call options across advance refundings, calls more than 90 days before the call date, and current refundings at the call date itself.
This pattern holds across later cohorts, though the 2010–2014 vintage shows reduced magnitude, likely reflecting the interest rate environment and the 2017 tax law eliminating the tax advantage of advance refundings (Figure 1).
Figure 1: Callable Bond Redemption Snapshot.
Bonds tend to be simpler. Issues sold with advisors are associated with less structural complexity: fewer nonstandard payment schedules and fewer exotic features. That reduces modeling risk and improves comparability across bonds. In 2000, advisor-involved bonds had 14 percentage points lower complexity than bonds without advisors. By 2024, this gap had narrowed to around 5 percentage points, but the relationship persists.
Disclosures demonstrate lower textual complexity. Offering documents have grown longer and more technical over time. But deals with advisors exhibit slower growth in textual opacity. This helps investors interpret risk and reduces uncertainty about contractual features. By 2018, advisor-involved bonds averaged disclosure complexity at one-tenth of a standard deviation lower than bonds without advisors.
Taken together, these patterns suggest that advisor involvement reflects either an active monitor or a proxy for more active debt management. Municipal bonds issued with the aid of a financial advisor are a bit simpler on average and better equipped to identify refunding opportunities and to act on them.
From an investor’s perspective, that translates directly into differences in expected cash flows.
Implications for Valuation and Liquidity
Standard bond valuation models treat call behavior as a function of interest rates and volatility. These models assume that issuers exercise options rationally and uniformly when it is optimal to do so. However, municipal issuers do not behave uniformly because their decision-making capacity varies.
Some issuers refund promptly. Others wait until years after the call date. Some repeatedly restructure debt; others almost never do. Ang et al. (2017) argue that early calls destroy value and create churn for issuers. Meanwhile, Chen et al. (2024) show that late calls are suboptimal since most of these options are deeply in the money for tax purposes. Even so, advisor involvement helps explain part of that variation.
This leads to two practical valuation implications:
1. Higher effective call risk for advisor-backed issuers: If an issuer is more likely to refund when rates fall, the bond’s expected life is shorter in low-rate environments. That reduces upside and increases reinvestment risk.
2. Behavioral optionality for advisor-light issuers: If an issuer is less likely to exercise the option efficiently, investors may enjoy longer exposure to high coupons than standard option models predict.
Two bonds with identical coupons and call dates may therefore deserve different option-adjusted spreads based on the issuer’s advisory relationship and involvement. If markets do not fully account for this signal, call risk may be mispriced.
This nuance extends prior research showing investors can simulate a call probability using historical issuer behavior. This would produce yield to effective maturity instead of either yield to maturity or yield to worst (Luby and Orr (2019)).
Further, trading costs in municipal bonds are notoriously large, and academic research (Harris and Piwowar, 2006; Brancaccio and Kang, 2025) has established that structural complexity (features like variable rates, sinking funds, non-standard interest payment frequencies, and call options) increases trading costs for investors.
Bonds with advisors show consistently lower structural complexity across these dimensions. Simpler bonds trade more efficiently in secondary markets, potentially offering better liquidity when you need to rebalance or exit a position.
The Incentive Puzzle
The number of municipal advising firms has been decreasing. Figure 2 shows the trends in the number of registered municipal advisors from two sources: SEC website and Form MA. Data and code related to these Form MA registrations include the different types of services provided and is publicly available on Harvard Dataverse and GitHub.
Figure 2: Trends in Number of Municipal Advisors.
The evolution of the fee structure provides important context for understanding advisor behavior. The market has consolidated around three compensation models: fixed fees, contingent fees, and hourly charges. Firms charging contingent fees—where compensation depends on deal execution—show significantly higher survival rates. After 10 years, about 50% of contingent-fee advisors remain active compared to just 30% of non-contingent fee advisors (Figure 3).
Figure 3: Survival Estimates, Registered Muni Advisor Firms.
This survival differential matters because contingent fee structures align advisor incentives with getting deals done, but not necessarily with optimizing deal terms for issuers. The regulatory framework attempted to address this through fiduciary duty requirements (Malakar 2024), but the structural incentive remains.
Research has shown that when advisors were prohibited from also serving as underwriters on the same deal—eliminating dual advisor-underwriter arrangements—financing costs fell by 11.4 basis points (Garrett 2024).
For investors and analysts, this creates an interesting tension. Advisors who survive tend to have incentives focused on deal completion rather than pure cost minimization. Yet the empirical evidence suggests that advisor involvement correlates with features (lower structural complexity, relatively less opaque disclosures) that could benefit ultimate investors through improved liquidity and price discovery.
What Can Investors and Analysts Do?
1. Connect issuer sophistication to portfolio design: Less financially sophisticated issuers may pose greater disclosure or governance risk, but they may also exercise call options less efficiently. For some investors, that trade-off may be attractive.
2. Reinterpret yield differences: A higher yield on a callable bond from an advisor-heavy issuer may simply compensate for higher call probability. Yield alone can be misleading without conditioning on issuer behavior.
3. Look beyond the first call date: Advance refundings and redemption mechanics matter as much as stated call provisions. Advisors facilitate these transactions, expanding the practical reach of the call option.
References
Ang, A., Green, R.C., Longstaff, F.A., and Xing, Y. 2017. “Advance Refundings of Municipal Bonds.” Journal of Finance 72: 1645–1682.
Brancaccio, G., and K. Kang. 2025. “Search Frictions and Product Design in the Municipal Bond Market.” Econometrica 93, no. 6: 2159–2199.
Chen, H., Cohen, L., and Liu, W. 2024. “Calling All Issuers: The Market for Debt Monitoring.” Management Science 71(8): 6367—6391.
Garrett, D. G. 2024. “Conflicts of Interest in Municipal Bond Advising and Underwriting.” Review of Financial Studies 37, no. 12: 3835–3876.
Garrett, D.G., and Malakar, B. 2026. “The Evolving Role of 21st Century Municipal Finance Advisors.” Public Budgeting & Finance 0: 1-24.
Harris, L. E., and M. S. Piwowar. 2006. “Secondary Trading Costs in the Municipal Bond Market.” Journal of Finance 61, no. 3: 1361–1397.
Luby, M.J., and Orr, P. 2019. “From NIC to TIC to RAY: Estimating Lifetime Cost of Capital for Municipal Borrowers.” Municipal Finance Journal 39(4): 29—45.
Malakar, B. 2024. “Fiduciary Duty in the Municipal Bonds Market.” Municipal Finance Journal volume 45, numbers 2-3, Summer-Fall 2024.
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All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.
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