If you are looking for the highest CD rate, you may want to consider brokered CDs. Many times CDs offered through brokerage firms have rates lower than what you could get by buying the CDs directly at banks or credit unions. However, sometimes you can get a higher rate for a specific maturity with a brokered CD. Readers commented on Friday about 10-year brokered CDs at Fidelity and Vanguard that have higher rates than what you can get directly at banks or credit unions.
I checked this morning (7/30/2012), and Vanguard and Fidelity are currently offering new issue brokered 10-year CDs from GE Capital Retail with a 2.60% yield.
In today's awful interest rate environment, this is a high rate. The highest rate from a nationally available direct CD is 2.50% APY from Patelco Credit Union (7-year term). The highest at a bank is 2.25% APY at Discover Bank (10-year term).
The deals are not as good for shorter-term brokered CDs. For example, Vanguard lists a yield of only 0.60% for 1-year CDs. You can get a direct CD for a 1-year maturity with a yield over 1.00% at several internet banks.
To see the latest rates at Fidelity, go to the Fidelity CD page and click on the "See new issue CDs" link at the top of the right menu.
To see the latest rates at Vanguard, go to the Vanguards Bonds & CDs page and click the "Buy CDs" link at the top of the "CD Yields" table.
You'll need a brokerage account to buy these brokered CDs.
Brokered CD Downsides
It should be noted that brokered CDs have some downsides as compared to direct CD (besides lower rates):
One important downside to brokered CDs is that you have to sell it on the secondary market if you need the money before maturity. You could lose a significant amount of principal if you have to sell it. You typically would lose more if interest rates are rising.
All of the CDs offered by Vanguard and Fidelity are FDIC-insured. However, it's important to understand that if you purchase a CD at a premium on the secondary market, the amount of the premium is not FDIC insured.
With a brokered CD, you will not receive a certificate or other evidence of ownership of the CD from a bank. In short, you may have to trust your broker in maintaining the proper documentation to ensure your deposits will qualify for FDIC coverage if the issuing bank should happen to fail. DA reader Over6T described this issue in a comment from a previous brokered CD blog post. This issue has also been discussed at length in this Bogleheads thread.
If the issuing bank should happen to fail, there may be some issues even if your broker has all of the proper documentation for the FDIC. There can be a long delay before you can get access to the money. The FDIC needs the brokers to provide detailed customer account information which can take more than a month. A reader commented in this blog post about a brokered CD through Schwab that was held by a bank that failed in 2009. He was told he would have to wait up to 6 weeks for his money.
It's not necessarily a downside, but interest on brokered CDs is typically not compounded. The regular interest payments are paid into your core brokerage account.
Also, you should not expect that your brokered CD will be automatically renewed when the CD matures. This may be considered an advantage over most direct CDs since you don't have to worry about missing the grace period.
Brokered CD Advantages
Brokered CDs do have some advantages over direct CDs.
If you are concerned about the CD disclosures from banks which can restrict your right to an early withdrawal, you won't have to worry about this issue with a brokered CD in which you can sell in the secondary market. This won't protect you from a loss, but at least you will have access to your money.
For those who place a high value on simplicity, brokered CDs can have a big advantage. You can buy brokered CDs without all the paperwork that's required when you buy a direct CD. Also, with brokered CDs you can manage multiple CDs issued by different banks from one brokerage account.