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Comparing Brokered CDs with Traditional CDs

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Comparing Brokered CDs with Traditional CDs

In the last few months since the rise of Treasury yields, we have seen much higher rates on long-term brokered CDs. In the last few years brokered CD rates couldn’t compete with CD rates you could get by going directly to a bank. That’s no longer the case for long-term CDs. I thought it would be useful to do some comparisons between brokered CDs and CDs offered directly from banks.

There are some advantages with brokered CDs. One big advantage is simplicity. 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.

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.

Brokered CDs also have several downsides as compared to direct CDs. I reviewed some of these downsides in this blog post. Some of these downsides include added risk. The FDIC recently published a consumers guide on brokered CDs and mentioned a few potential risks. I reviewed this consumers guide and brokered CD risks in this blog post. You can reduce the risks by purchasing brokered CDs from reputable brokers like Fidelity and Vanguard.

Below are a few of the brokered CD offerings from Fidelity. Sometimes you can get higher rates from Vanguard, but for simplicity, I’m only listing those from Fidelity. I only list CDs that are call protected. Below the brokered CD list, I’ve included the best CDs that are available directly from banks so you can see how they compare for different terms.

It’s important to note that these rates change constantly, so these should be considered only a snapshot as of 8/14/2013.

Fidelity Brokered CDs - New Issue Offerings

  • 10-year: 3.05% issued from Discover Bank and Goldman Sachs Bank
  • 7-year: 2.50% issued from Discover Bank and Goldman Sachs Bank and other banks
  • 6-year: 2.10% issued from GE Capital Retail Bank
  • 5-year: 1.95% issued from Discover Bank
  • 4-year: 1.40% issued from GE Capital Retail Bank
  • 3-year: 1.10% issued from Ally Bank
  • 2-year: 0.75% issued from Ally Bank
  • 1-year: 0.45% issued from Bank of Baroda

Best Direct CDs from Banks

  • 10-year: 2.00% APY Jumbo CD at Intervest National Bank
  • 7-year: 1.80% APY at Discover Bank
  • 6-year: 2.00% APY at Third Federal
  • 5-year: 2.06% APY at EverBank
  • 4-year: 1.61% APY at EverBank
  • 3-year: 1.50% APY at Salem Five Direct
  • 2-year: 1.25% APY at Salem Five Direct
  • 1-year: 1.05% APY at GE Capital Bank

As you can see above, the best rates for CD terms over 5 years are from brokered CDs. The direct CDs take the lead at 5 years, and the lead grows as the terms shorten. So if you prefer a short-term CD, you’ll earn much higher interest rates by dealing directly with the banks. If you prefer long-term CDs with terms over 5 years, you’ll earn the best rates with brokered CDs.

To find the latest best rates of direct CDs from both banks and credit unions, please refer to our CD rate tables.


  Tags: CD rates

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Comments
27 Comments.
Comment #1 by OldGuy posted on
OldGuy
I have brokered CDs in my IRAs at Fidelity and Vanguard.  This week, I bought both Discover Bank's 1.95% YTM 5-year CD and 2.50% YTM 7-year CD for my Vanguard IRA.  Those rates compare to Discover's 5-year direct IRA CD APY of 1.50%, and its 7-year APY of 1.80%.  Seems a pretty big spread to be justified by simply the difference in early withdrawal rights. 

4
Comment #2 by Anonymous posted on
Anonymous
Just remember that brokerage c.d.'s generally come in two different types and have different advantages and disadvantages.

Some are new issues which are close to being the same as the the one you get from a bank. 

Other type of CD's sold by brokerage firms the ones in the secondary market.  My understanding is that on secondary issues, if you pay a premium for the cd (above par), then that part is not fdic insured.

Also be aware that some of the CD's are callable and I am not sure why anyone would want a callable CD.

8
Comment #3 by Anonymous posted on
Anonymous
Callable CDs are safe from being called since rates would have to go substantially down to be called and that scenerio is unlikely since rates are so low already.

9
Comment #4 by Anonymous posted on
Anonymous
btw: brokered CD, the interest cannot be withdrawn on an yealy basis...that is a big con for people dependent on that money !

4
Comment #5 by Anonymous posted on
Anonymous
#4,

I was under the impression that with brokered CDs the interest was paid monthly/quarterly/semi-annualy/ to the holder.  Isn't that the case??

2
Comment #6 by OldGuy posted on
OldGuy
You are correct #5.  The frequency varies with the issuer bank, but once interest is credited to your brokergae account it can, at least at Fidelity and Vanguard, be ACH'd out immediately.  For me, the real downside is that it can be tough to reinvest at the broker if you have an IRA and want to keep the funds there.  Minimum CDs are generally $10k at Vanguard and $1k at Fidelity.

6
Comment #7 by lou posted on
lou
OldGuy, why is it difficult to have the CD interest directed to your IRA brokerage core account if it is the same account that owns the brokerage CDs?

1
Comment #8 by paoli2 posted on
paoli2
Our interest is paid into our Cash accounts at our brokerages on our IRA accounts according to however the CD pays when we purchase it.  It will state whether it will be monthly, semi-annual etc. and you know before you select it when to expect the interest to be sent to the brokerage's account for your holdings.  I use this interest at the end of the year to withdraw for some of the RMDs that are due.  Unfortunately, with these low rates, it is never enough to withdraw for the amount needed so I always have a smaller CD maturing for each year to withdraw for RMDs for all accounts.

3
Comment #9 by Anonymous posted on
Anonymous
Most banks and credit unions will allow you, at your option, to take the yearly RMD amount required for that specific IRA CD without any penalty for early withdrawal; but, I do not think brokerage firms allow this option. 

1
Comment #10 by paoli2 posted on
paoli2
#9:  I think you are right.  We can't withdraw from the CDs until they mature.  This is why I set the interest aside in another account and always have a CD maturing just to use for the RMD.  Our banks allow us to withdraw money for RMDs without a penalty but it seems to be different with the brokerage CDs. 

4
Comment #11 by OldGuy posted on
OldGuy
Lou,

Interest on my IRA CDs at Fidelity and Vanguard does go into my core IRA cash accounts there.  I don't withdraw those amounts because I'm 67 and don't want to make any taxable withdrawals from my IRAs until I'm 70-1/2, when I have to.  If I get, say, $300 for 6 months interest on a GS Bank CD at Vanguard, I can't reinvest it in another GS Bank or other bank brokered CD, because of Vanguard's $10k minimum purchase requirement.  It goes into a Vanguard money market fund, which pays basically nothing. Eventually, I may take accumulated interest and do a trustee-to-trustee transfer of it to, say, my CIT IRA savings account, just to get more than I can get on Vanguard's money market fund. 

2
Comment #12 by Anonymous posted on
Anonymous
Does anyone know if a issuer's (bank) FDIC Certificate # can be determined by the CD CUSPID ?

Thanks

 

1
Comment #13 by paoli2 posted on
paoli2
#12 The Cusip numbers on my CDs are always different from the FDIC certificate numbers.  I usually go to the FDIC webpage to find the certificate numbers to insure the CD is insured.  I like to keep it for future use if ever necessary.  My brokerages give me a Cusip number but not the FDIC certificate number.

2
Comment #14 by Anonymous posted on
Anonymous
#13,

As you can see, I'm new to buying brokered CDs.  Your help is much appreciated.

     Does the brokerage firm provide you with the FDIC Certificate Numbers after purchase?

     Would you send me the FDIC website where you validate insured coverage?

     Does the Cuspid # have anything to do with proving their insured?

 
Thanks.

1
Comment #15 by paoli2 posted on
paoli2
#14  This is the way I check if insured.  I get the name of the bank and city it is in and go to www.fdic.gov. I go to Bank Find and when the bank pops up it will give you the FDIC Certificate number for the bank and you can also read the history if you like.  I write this down with the Cusip number in case I need for future use.  Many times I do this before I buy the CD to make sure everything is really ok with the bank it is from.  I have been buying brokered CDs for many years for our accounts and found "Bank Find" on the FDIC site to be very helpful.  Hope this helps.

1
Comment #16 by paoli2 posted on
paoli2
#14  I forgot to include that the Cusip number does not prove the bank is insured.  It is just a way of their keeping track of their CDs.  The FDIC Certificate number is what you need to have to see if it is insured. 

1
Comment #17 by paoli2 posted on
paoli2
#14  Sorry we can't add to earlier posts but this is the link I use:

http://research.fdic.gov/bankfind/

1
Comment #18 by Anonymous posted on
Anonymous
#17,

Thanks for the info. 

Is there a way to trace the CDs from you to your Brokerage firm and then to the issuing FDIC Bank?

Any type of documentation you receive upon purchase that provides for an audit trail?.

 

1
Comment #19 by paoli2 posted on
paoli2
#18  The only documentation I get from our brokerages, Vanguard and Fidelity are the paperwork showing name of Bank, Cusip number and pertinent info for CD such as amount, interest rate, maturity date etc.  They buy these CDs from the banks in large chunks and we are only buying a part of it.  I have never needed anymore documentation than what they give in all these years.   I always insist that the paperwork they send states "FDIC insured".   Some time ago, one of the banks I purchased a CD from closed and they immediately returned the full amount to our Money Fund with the brokerage and I was able to repurchase another CD from another bank off of their list without any problem.  We did not have to get involved with the closing bank in any way.  That is the part I really like about brokerage CDs. 

2
Comment #21 by Anonymous posted on
Anonymous
#19,

Do you rely solely on the Brokerage Firms to provide you with FDIC insured CDs?

What other documentation do you get that shows the Master Certificates issued by the bank and held by the Depository Trust Company (“DTC”) are properly title as required by the FDIC?

Thanks.

 

1
Comment #22 by paoli2 posted on
paoli2
#21:  Thank you for your question.  Not wanting to take anything for granted, I just called one of our brokerages who we have done business with for many years purchasing CDs for a Rollover IRA (Fidelity).  I spoke to a rep who  assured me they certainly do make sure they have documentation that all of the banks they buy CDs from are FDIC insured.  They do not provide this to buyers.  All they have to provide to us is the information that the particular bank we are purchasing from is FDIC insured.  If they put on the statement or prospectus that it was and it was not, they would be deceiving their customers.  The rep spoke to her senior rep about this for me and he agreed with her information. We, as I informed you earlier, also need to do our due diligence and check up on any other info we want about the bank ourselves if we want to know it's financial standing etc.  They do not provide this type of info to customers.  I have refused to purchase certain CDs in the past because after my research, I found out they were just one or two star banks and not of the quality I want to deal with. 

I do not think big brokerages like Fidelity or even Vanguard would risk not having all the documentation they need on the CDs they purchase in big blocks for customers.  They are not responsible for the financial standing of the banks they purchase from.  This is why I do my own homework in this area. I have never dealt with Charles Swab so I do not know how they handle their CDs.

3
Comment #20 by tomlawler posted on
tomlawler
I recently locked in a 10 year CD through my Schwab account for 3.10 percent. For longer terms, brokerage accounts are definitely the way to go.

1
Comment #23 by Anonymous posted on
Anonymous
Paoli2,

In your post #22 you stated "If they put on the statement or prospectus that it was and it was not, they would be deceiving their customers".

If the brokerage firm "deceived their customer" and a bank defaulted that had a brokered cd, who would  cover YOUR potiential losses?

Thanks.

2
Comment #24 by paoli2 posted on
paoli2
#23  You seemed to have missed the main point of my reply to #18.  Your concern is why it is so important to take the time to find out for yourself if the bank's CDs you are purchasing is an FDIC insured bank.  This way "you" make sure of your protection in the same way you would if you bought a CD from any bank off of the internet or listed on Ken's page etc.  This way if the bank goes under and it was never FDIC insured, it would mean "you" didn't do your responsibility and it would be your fault if you lose all your deposit.  Fidelity telling me a certain bank is FDIC insured is secondary to my making "sure" of that fact myself.  I would blame myself for not checking up on them.  I can be quite paranoid when it comes to trusting money to any bank or institution. 

You also have to consider what it would do to the brokerage's financial standing if they were caught lying to customers about something so important as FDIC insurance.  That would make one heck of a Class Action Lawsuit that could destroy them.  I don't think they would risk it.  Also, if the CD is from a legitimate US bank and you check it out on FDIC Bank Find, you can see very easily the Certificate number for the insurance.  I do the same research on all banks I deal with not just for brokerages.

1
Comment #25 by Anonymous posted on
Anonymous
Paoli2,

My point is that the Broker Cds need to be set up "properly" by the issuing bank.  The fact that you check the bank is FDIC insured isn't enough.

As you stated, Fidelity "have documentation that all of the banks they buy CDs from are FDIC insured" but "They do not provide this to buyers".  This is the documentation you need to back-up any claim you may need if a bank defaults.

You are trusting Fidelity that the CDs were set-up properly.  Why is it that Fidelity doesn't provide this documentaton to you?  I don't believe you have the ability to do this verification on your own.

As you see, I too can be quite paranoid when it comes to trusting money to any bank or institution.

Thanks.

1
Comment #26 by paoli2 posted on
paoli2
#25 I have no idea who you are since you are posting anonymously as is allowed.  However, I have been dealing with Fidelity and Vanguard probably before you were born and have never had the type of problem you are concerned about.  If brokerages "had" to share their documentation with us, I am sure they would. No matter who you deal with, you are not going to get all the info you want.  I have had a bank fail before the CD matured and the brokerage took care of seeing that the entire amount was returned to the account.  That is what is important to me that we get the money back in these cases.  Do you realize how customers would seem if they had available to them directly from the FDIC that a bank was insured and yet they insisted the brokerage give them copies of their documentation?  It is not necessary for them to do this.  I don't have to trust Fidelity that they set up the CDs properly.  I just have to have proof that we own a CD in that particular bank and it has FDIC insurance.  You, for some reason, are making problems where they don't have to exist.  I have never had the FDIC ask us if we had such documentation and I don't believe you have either.  Don't make problems where they don't exist.  Why don't you call the FDIC and ask them if this "documentation" you are so concerned about is necessary for customers to have?  I would do it but I have spent enough time today on this and frankly don't think it is necessary.  If you get an answer that proves you have legitimate concerns, please let me know.  Thanks.

3
Comment #27 by Anonymous posted on
Anonymous
Purchasing a long term CD in a rising interest rate environment is short of lunacy, especially with a call feature.  If and when rates go up, no bank is going to call that CD.  If you purchased a long term CD earlier this year, your value has dropped significantly with the rise in rates.  I hope your plan is to hold until maturity.  In a rising rate environment, the bank says "heads: I win. tails: you lose".

1