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Comparing Rates: Brokered CDs vs. Direct CDs

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In the last few months, short-term brokered CD rates have become very competitive with direct CD rates. Before this year, direct CDs, especially those from internet banks, were the clear rate leaders for terms under 3 years. That has changed, and now brokered CDs are either ahead or close to the internet bank rate leaders.

Brokered CDs are purchased through brokerage firms like Fidelity, Vanguard or Charles Schwab. I’ve written many times about the pros and cons of brokered CDs. Last year, Charles Rechlin wrote a useful overview of brokered CDs and how they can simplify IRAs. In March of this year, Charles provided additional information on brokered CDs and reviewed how some of their rates compared with direct CDs. Due to the recent changes in short-term rates, I thought it would be interesting to review this again.

During the early stage of these near-zero interest rate years, brokered CD rates couldn’t compete with CD rates you could get by going directly to a bank. However, that changed around 2013. At that time, long-term brokered CD rates increased substantially until they exceeded direct CD rates. In this August 2013 post, I compared the top brokered CD rates with the best direct bank CD rates. As you can see in the 2013 post, brokered CD rates far exceeded direct CD rates for terms of 7 and 10 years. However, for a 5-year term, direct CDs took the lead. The lead grew for shorter terms. At the shortest term surveyed, the 1-year brokered CD rate was 60 bps above the best brokered CD rate.

Long-term brokered CD rates have remained competitive since 2013. This year shorter-term brokered CD rates started to rise. This is likely the result of the last three Fed rate hikes. As the short-term brokered CD rates became competitive, I included them in my biweekly CD summaries. First I included 2-, 3- and 4-year terms. Then in June I included terms under one year.

Below are a sample of the top rates for various terms 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 new issued CDs that are call protected.

Banks that Offer Both Brokered CDs and Direct Internet CDs

Below the brokered CD list, I included direct CDs from the banks that are offering the best brokered CDs. Discover Bank is one of the few internet banks offering 10-year and 7-year CDs. As you can see, their brokered CD rates for these terms are higher.

The difference is much larger for American Express Bank. The two American Express Banks (American Express Centurion and American Express Bank, FSB) were offering the best brokered CD rates for terms of 5-years to 2-years. These rates are much higher than what American Express’s internet bank is offering (The internet bank accounts are offered by American Express Bank, FSB).

Goldman Sachs Bank USA is offering the best brokered CD rates for terms of 12, 9 and 6 months. For the 1-year term, the brokered CD rate is just a tad higher (1.45% vs 1.40%). However, the brokered CD rates are much higher for the 6- and 9-month terms.

Goldman Sachs isn’t alone offering low short-term rates. Many of the large internet banks continue to offer 6-month and 9-month CD rates far below their online savings account rates. Anyone looking for a short-term CD from an internet bank should remember the 11-month No Penalty CDs from both Ally Bank and CIT Bank as I explained in my Ally No Penalty CD review and in my CIT Bank No Penalty CD review.

How the Best Direct Bank CD Rates Compare

The last list shown below includes the best CDs that are nationally available directly from banks. For apples-to-apples comparison, I excluded credit unions. Also, I excluded non-standard terms (like 61 months). I assumed a minimum deposit of $100k for the direct CDs. Several of these banks are not the well-established internet banks. Crestmark Bank is one example. Its Jumbo CDs ($100k minimum) currently dominate for terms of 2 years and under. State Bank of India Chicago has the best 60-month CD rate and KS StateBank has the best 7-year CD rate.

As you can see below, 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 generally grows as the terms shorten. The 4-year term is one exception. Also, it should be noted if it wasn’t for Crestmark Bank, brokered CDs would be the rate leaders for 6- and 9-month terms.

Please note that these rates change constantly, so these should be considered only a snapshot as of 8/21/2017.

Fidelity Brokered CDs - New Issue Offerings

  • 10-year: 2.70% issued by Discover Bank
  • 7-year: 2.50% issued by Discover Bank
  • 5-year: 2.40% issued by American Express Centurion and American Express Bank, FSB
  • 4-year: 2.20% issued by American Express Centurion and American Express Bank, FSB
  • 3-year: 1.95% issued by American Express Centurion and American Express Bank, FSB
  • 2-year: 1.75% issued by American Express Centurion and American Express Bank, FSB
  • 1-year: 1.45% issued by Goldman Sachs, Discover and other banks
  • 9-mon: 1.40% issued by Goldman Sachs, Compass and other banks
  • 6-mon: 1.30% issued by Goldman Sachs, Banc of California, N.A. and other banks

Direct CD Rates from Discover, Goldman Sachs and American Express Banks

  • 10-year: 2.35% APY at Discover Bank
  • 7-year: 2.30% APY at Discover Bank
  • 5-year: 1.70% APY at American Express Bank
  • 4-year: 1.45% APY at American Express Bank
  • 3-year: 1.25% APY at American Express Bank
  • 2-year: 1.00% APY at American Express Bank
  • 1-year: 1.40% APY at Goldman Sachs Bank
  • 9-mon: 0.70% APY at Goldman Sachs Bank
  • 6-mon: 0.60% APY at Goldman Sachs Bank

Best Direct CDs from Banks

  • 10-year: 2.35% APY at Discover Bank
  • 7-year: 2.40% APY at KS StateBank
  • 5-year: 2.48% APY at State Bank of India Chicago
  • 4-year: 2.16% APY at M.Y. Safra Bank and TIAA Direct
  • 3-year: 2.00% APY at Salem Five Direct, TIAA Direct and Crestmark Bank
  • 2-year: 1.85% APY at Crestmark Bank and GiftsforBanking.com
  • 1-year: 1.70% APY at Crestmark Bank
  • 9-mon: 1.55% APY at Crestmark Bank
  • 6-mon: 1.50% APY at Crestmark Bank

How Rates Have Changed Since 2013

Refer to my 2013 comparison to see how the above rates compare with the brokered and direct CD rates four years ago.

Four years ago, the best 10-year brokered CD rate was 3.05%. However, the best 7-year brokered CD rate was the same as today (2.50%). All the shorter-term rates are higher today. This is especially the case for the 1-year brokered CD rate. In 2013, the top rate was only 0.45% which is a full percentage point under today’s top rate.

To find the latest best rates of direct CDs from both banks and credit unions, please refer to our CD rate tables. You can see how direct CD rates compare with brokered CD rates every other week in the CD rate summary.
Previous Comments
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Bozo
  |     |   Comment #1
Ken, my wife just received an unsolicited solicitation from Morgan Stanley. 1.9%, 11 months, brokered CD, insured. I'll be contacting them to see if there are any "wrinkles", but it would appear to be a loss leader for "new money".

Mind you, the offer was addressed to her, not both of us. Guess I'll get to be the "POD" on the CD, should she open it.
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Bozo
  |     |   Comment #14
Further to my comment #1, after discussion with the representative at MorganStanley, I'm passing on the offer.
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Bozo
  |     |   Comment #28
Further to my comment #14, well, we're now negotiating. It's clear the representative wants a new client, and all I want is a CD. My wife and I will be meeting with the representative this week or next. Will she convince MorganStanley to waive its $175/yr brokerage fee? Will my wife turn on her charm offensive? Do they have free coffee? Schwab, which is but a block up the street from MorganStanley, has not only free coffee but doughnuts. We retired folks like those free doughnuts.
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scubabelle
  |     |   Comment #43
Hi Bozo. We have a brokerage account at Morgan Stanley and were offered the 11 month 1.9% brokered CD (new money only). If you have enough money with MS, they'll waive your fees. And - yes - they have free coffee ;)
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Ken's Fan
  |     |   Comment #30
I opened a cd with morgan Stanley. This is my first time opening a cd through a brokerage. My broker is very inexperience, but from my experience best day to put money in your brokerage is on Monday and u will start earning interest on Thursday. Lets say if u fund your brokerage account on Tue, wed , thurs or Friday, your money will sit in your brokerage account till following thusrday earning 0.10 %.
My annual account fee was waived after I personally spoke to branch manager.
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Bozo
  |     |   Comment #39
Ken's Fan (re comment # 30) I have no idea where this meeting with MorganStanley is going. All I know is my wife (cooler head) suggested we at least meet with her.
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NOT A FAN
  |     |   Comment #48
THESE BROKERED AND CALL CD'S ARE LIKE FRANKEN PRODUCTS,,,,fdic "protected" but sold via NON FDIC RETAIL FIRMS,,,,,i believe as bait for the risk averse types for a few BIPS more, to get them into a switch scheme? they are products specially created for the NEW YORK PARASITES,,,,that work the investment and wealth management side of the banks and cu's,,, to sell to the skittish and others,,,so they have something to sell when everything else is sucking air. i'm not gonna put food on the table of some wise guy for a lousy point net gain, since these wall street smart guys charge for everything they sell.
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HappyTimes
  |     |   Comment #2
I like brokered CD's (Schwab) but there are few caveats. Interest is generally paid every six months as a cash deposit into your account; it does not compound. This cash can be reinvested, used to pay taxes or for the purchase of other investments. Brokered CD's can be sold. Since rates declined, my 3.3% CD's could be sold at a profit. Had rates risen to say 4% I'd have to sell at a loss, similar to paying an EWP. I've always taken a CD to maturity so this is not a major concern for me. Rate chasers will probably shy away from brokered CD's.

There is no automatic CD renewal with brokered CD's. . I think this provision should be illegal as it potentially traps an investor in a rate/time/EWP they may not want. Some, like Penatgon Federal, have a check box so you can opt out of automatic renewals but others (FNB) do not. Again, I find this a prime example of manipulation that should be outlawed.

Considering the ease of purchasing online brokered CD's I'm surprised more banks aren't available on the brokerage sites. Relationship banking is slowly giving way to the ether.
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HappyTimes
  |     |   Comment #3
Allow me to add a major advantage to brokered CD's. Convenience. One site, one brokerage, a list of all accounts and one point of contact.
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Bill
  |     |   Comment #6
Great point Happy Times - Several years ago, I had almost all of my CD's and IRA's with Fidelity and it was a very simple and convenient setup. Then, as rates tumbled, I began rate chasing and, as a result, I have ended up with multiple accounts at multiple institutions. It takes quite a bit of time to manage the various accounts now and I plan to gradually consolidate back to Fidelity once again. I have not done any calculations as to if my multiple accounts, and related efforts, have resulted in more income than they would have had with Fidelity and, at this point, I don't even want to know. lol
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Luvcd
  |     |   Comment #4
If one wants market fluctuations...go for it. If one wants a bank to treat their direct deposit "customers" differently...go for it. If one likes dealing with a SPIC...go for it. If one likes seeing "a body" at a brick and mortar teller window...don't go for it. If one wants to see few branch offices...go for it. If one doesn't want to go to a local branch during the next banking "crunch"...go for it. On and on...been there, done that! And, FDIC, should be ashamed!
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3
DOA
  |     |   Comment #5
What has always troubled me about brokerage IRA cd's is when you have to start taking RMD distributions at age 70-1/2. If perhaps your CD has declined in asset value and is below the value that you initially paid for it, then you actually lose that amount of difference when you have to sell enough of it to satisfy your yearly RMD. It just seems like a trap you can get yourself into if you are not careful.
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Ann
  |     |   Comment #7
Sounds like you should make sure to keep some non-CD investments in any IRA account at that age, then.
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Bozo
  |     |   Comment #8
Ann (re comment # 7) it is my understanding that a RMD from IRAs may be satisfied from any (or all) IRAs. For example, you tote up your total IRAs at the end of a calendar year. Then you apply the applicable percentage, according to your age. You can then multiply the total by the percentage, and withdraw as you please. I always found withdrawing a bit here, and a bit there, to be burdensome. For example, in my first year of RMD, I just whacked off cash from my Schwab SEP-IRA. In my second year (next year), I will whack off part of an IRA CD coming due in January of 2018 at KeyDirect (to satisfy my RMD), and plop the remainder as a rollover into a new IRA, either at PenFed or StateFarmBank*.

Managing RMDs is not all that hard, when you get the hang of it.

*It's complicated, but both allow partial withdrawals from IRA CDs with no EWP over the age of 59 1/2. Negotiating EWP waivers on RMDs can get tricky.
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Bozo
  |     |   Comment #9
Further to my comment #8, I had an interesting experience with Patelco. The Members Handbook (and the Branch Manager) seemed to confirm partial withdrawals from IRA CDs would be permitted with no EWP. When I called the home office to confirm, I was "put on hold", then advised they would "call me back". When they called me back, I was advised partials were not permitted, and the EWP would be waived for folks over 59 1/2 only on a total cash-out.

So, that leaves PenFed, NWFCU, and StateFarmBank as the only institutions which explicitly allow partial withdrawals from IRA CDs with no penalty, for folks over 59 1/2.

If any other DA readers have other institutions which offer this perquisite, kindly post.

Thank you kindly,

Bozo
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Nothing
  |     |   Comment #17
Negotiate going in, document it, test it within a couple of weeks (if one is in doubt). Never a problem with my banks/cu...but it was in place for years. If partial not allowed "threaten" to withdraw all and move $s...a reason to not unnecessarily take distributions!
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Bozo
  |     |   Comment #19
Poster "Nothing" (re comment # 17): In my particular case, it was "no harm, no foul". Both the Branch Manager at Patelco and I read the Members Handbook to allow partial withdrawals from IRA CDs for folks over 59 1/2 with no EWP the same way. I will admit, the Members Handbook was somewhat vague, which is why I ran it up the flagpole. One scenario: I drive down to my local Patelco office (a five minute drive) and cash out my IRA CD. I then turn around and buy four or five IRA CDs (rates haven't changed much). Another scenario: I just ignore it all, and let the IRA CD click along. I really don't need the money for RMDs, so scenario #2 is the most logical.
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Nothing
  |     |   Comment #25
Clown...the fun comes when QCD time arrives AND you want the check physically (payable to charity) to ensure proper payee, etc. Most banks/CUs don't know how to spell QCD nor what it means...start early! I have found having too many ira accounts after 701/2 defeats leverage on rate, term, etc. To each their own!
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hank
  |     |   Comment #18
But I assume, bozo, that any bank or credit union will make a RMD without penalty. My dad has cds at several banks and they send a check yearly out of the cd without penalty every year...
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Bozo
  |     |   Comment #20
Hank (re comment #18) it gets tricky. While many (most?) financial institutions will waive the EWP for IRA CDs for a Required Minimum Distribution (RMD), the issue is somewhat subtle. For example, if you have a total IRA of, say, $2 million, and you need a RMD of roughly 3.64% X $2 million, will any single IRA CD account allow a penalty-free withdrawal in that amount? My guess is "no". Which gets us back to StateFarmBank and PenFed.

I have my RMD bets hedged all over the place.
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Bozo
  |     |   Comment #10
Further to comment #8, with respect to institutions which allow partials with no EWP from IRA CDs for those over 59 1/2, it's a coin-flip. StateFarmBank and PenFed are both recognized institutions. Each is insured, one by the FDIC, the other the NCUA. I have made two "partials" with StateFarmBank, and have received each check within a week to ten days.
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DOA
  |     |   Comment #13
I see you have a plan, but my point was if someone had all their IRA cd's in brokerage accounts and none mature in the year they have to make a RMD. The value of the cd's could be less than what they paid and they have to sell a portion at that price to meet thei RMD. That is the kind of trap that you could get in. The only way to avoid this is careful planning for future yearly RMD requirements so that the proper amount of maturing cd's happen at the right time to meet the the yearly RMD or have planned outside sources of non brokerage IRA accounts to draw from.
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DOA
  |     |   Comment #22
I like the no penalty for partial withdrawals from penfed and state farm, but the problem is that it may indirectly be costing you anyway. If you stay with them, for now anyway, they are currently paying about 50 basis points less than what you can get elsewhere on a 5 year IRA CD.
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Bozo
  |     |   Comment #23
DOA (re comment #22), I appreciate that StateFarmBank and PenFed are not exactly on the leader-board these days. It's more a matter of planning for, and funding, RMDs. As I noted, it can get tricky.

Example: you have an IRA CD paying a pathetic 1% interest. It has three years to run (OK, this is a hypothetical). The IRA CD would basically cover your RMD. The terms and conditions allow for penalty-free RMD withdrawals. So, you submit a "cash-out" withdrawal request. Oops, they hit you with an EWP. But, you say, it's for my RMD. Sorry, they say, only 3.64% X your CD with us is eligible for the waiver of the EWP. Ouch.
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alan1
  |     |   Comment #12
(Apologies if this pops up twice).
It is my understanding that you cannot make penalty-free "withdrawals" from brokered IRA CDs to satisfy required minimum distributions. Quite simply, you cannot make "withdrawals" from brokered CDs. You can sell some or all of a brokered CD. The price you receive may be more (or less) than the price you paid.
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oldbanker
  |     |   Comment #21
@12 If that's the case , you could have all brokered cds and have just one ira cd at a local bank or online bank and take all RMD from that single bank. I do mine at a bank right up the street from my house. 14 ira cds , 1 RMD withdraw from one bank per yr.
Very easy
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Bozo
  |     |   Comment #24
Oldbanker (re comment # 21), those of us who are truly paranoid about RMDs have back-up plans. For 2018, I will harvest some (not all) of a maturing IRA CD at KeyDirect. I will plop what I don't need in a rollover, and harvest it in 2019. In 2020 and beyond, I can tap StateFarmBank and PenFed. No EWPs as far as the eye can see. Should I live long enough, we can talk about other accounts.
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oldbanker
  |     |   Comment #26
@24
I am too old and have high B.P. to hope that bank A will do something and if not, back it up with bank B and bank C and so on. If I need an RMD of $8,000.00 next year I will have a $10,000.00 cd maturing then. I cannot play that close to the vest like you do.
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RJM
  |     |   Comment #11
I'm curious if we are allowed to ask and are the brokers required to tell us how much their "cut" is ?

I have a number of them at Fidelity but Ive never asked nor do I recall any detail regarding Fidelity's compensation.

I know we are allowed to ask the amount of payment for order flow.
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please, mr. custer
  |     |   Comment #15
RE: CINC'S SPEECH, 21 AUG 17; the OMB and FED, are no doubt calculating the cost of a reinvigorated AFGHAN WAR. this does not bode well FOR FUTURE FED RATE HIKES! Make hay while and where you can. the wall street mavens are figuring the war tech-defense stock angles and plays and depositors ought do the same, IMO..... IF WAR IS GOOD BUSINESS,,,,,,HOW MANY WALL STREET AND DC GOVT OFFICIALS, POLITICIANS, AND BUREAUCRATS WILL BE INVESTING THEIR KIDS? HOW MANY WALL STREET AND MONEY ECONOMY POINDEXTERS OF ENLISTMENT AGE WILL ANSWER THE CINC'S CALL TO ARMS? The FED will make any excuse to keep rates low, now they have a good excuse, but i'm no whale, what do i know?
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CapitalClimate
  |     |   Comment #16
Brokered CDs have an advantage over most direct CDs if you want to have some control over the timing of the income for tax purposes. Direct CDs tend to pay interest only monthly or quarterly (Ally is a notable exception), but many brokered CDs with terms of 1 year or less are available with interest paid at maturity. At this point in the year, these CDs with terms of 5 months or more will pay all of their interest in 2018. The current top 1-year rate of 1.50% listed at Fidelity is for a CD with interest payable at maturity.
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ChasinRates
  |     |   Comment #27
Why would a bank do this (offer a higher rate for a brokered CD than for a Direct CD)? What is the advantage for the bank? What is the catch?
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Bozo
  |     |   Comment #29
ChasinRates (re comment # 27), I agree it makes no sense. Theoretically speaking, a financial institution could act both as a direct issuer and as a broker.
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Lrdx
  |     |   Comment #31
Brokered CDs are cheaper. No client accounts or support.
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bbb
  |     |   Comment #32
Many brokers have client base that vastly surpasses the client base of a small/mid sized bank. When such banks offer their CDs via brokerages they get to put their products in front of a very large client base which is advantageous to the banks.
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Att
  |     |   Comment #33
Some institutions charge a trade fee. They also take a cut of the APY. If you have an Advisor relationship that is based on percentage of funds the amount of the CD is included under assets managed.
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Nothing
  |     |   Comment #34
Different "quality" of funds....those from a brokered CD are "in the bank" and the buyer does not have a put. Direct CDs are subject to the whims of the buyer, EWP, distribution rules, RMDs, fewer account holders with brokered CD with more $s, etc. And if one is out of brick and mortar business...less o/h and more profit.
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CapitalClimate
  |     |   Comment #35
There's been some discussion here about the issue of IRA RMDs being a problem with brokered CDs. In fact, brokered CDs have an advantage in that IRA distributions may be made "in kind." The only limitation is that the withdrawal amount would have to be in multiples of $1K (+ or - market price changes). The advantage of doing this in kind is that you don't have to sell the CD at what is likely to be a discount from the market value. Because trading in any particular CD issue is very thin, there is usually a large spread between the bid and ask price.

Ed Slott has a discussion of in kind IRA distributions here:
https://www.irahelp.com/slottreport/taking-non-cash-required-distributions-your-ira
Even though the discussion is in terms of stock, the same principle would apply to CDs.

Vanguard has a special form for in-kind withdrawals (PDF):
https://personal.vanguard.com/pdf/v110.pdf

Other brokers would have similar procedures. Good luck getting your favorite bank or CU to do this without EWP.
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DOA
  |     |   Comment #36
Thanks for this information. I was not aware that you could do this. Have you actually done "in kind" trade on brokerage IRA CD'S?
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CapitalClimate
  |     |   Comment #38
No, I haven't done this yet myself, but I've been assured that it can be done.
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alan1
  |     |   Comment #44
CapitalClimate, thank you. The In-Kind Distribution sounds great. BUT -- I looked at the Vanguard from you mentioned. It contains the following language:
"Distributions requested on this form may not satisfy IRS required minimum distribution (RMD) rules."
p. 3 https://personal.vanguard.com/pdf/v110.pdf

What does "may not satisfy" mean? I have no idea. Perhaps it simply means that the amount you distribute could be insufficient by the time the trade is executed. Or it might mean that for unspecified reasons, the distribution won't count toward your RMD. Or maybe it means something else. I am confused.
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DOA
  |     |   Comment #45
alan1, I looked this up and I am thinking this might explain what they are meaning. Maybe CapitalClimate can confirm this though:

Cons against in-kind distributions
Sometimes it can be difficult to value a security – for example if it is very thinly-traded. In a situation such as this, distributing the RMD in-kind can cause difficulties, especially if you’re hoping to minimize the distribution to only the required minimum.

With this in mind, in order to reduce confusion and ensure that you’re taking exactly the correct amount in your RMD, it can be prudent to maintain or create a cash holding that will be sufficient for your RMD.
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CapitalClimate
  |     |   Comment #47
You'd have to check with Vanguard to be sure, of course, but it sounds like they mean that, because of intra-day price fluctuations, the actual value of the withdrawal won't be known exactly until after it has been completed. This means that you can't use this method to withdraw a precise amount. You could plan to withdraw slightly more than the RMD, though.
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Bogie
  |     |   Comment #37
I knew it could be done that way, but couldn't explain it as well as you did. So I didn't even try. Sometimes people should just call the brokerage institutions themselves to get a first hand understanding how things really work.

By the way, most banks and CUs will allow RMDs from CDs without an EWP. I know all the ones I do business with will.
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DOA
  |     |   Comment #40
Thanks for a real good tip. What is the cost basis once the CD is moved into the no IRA brokerage account? Does the cost basis stay the same as what you paid for it inside your IRA or is the cost basis adjusted to the transferred amount?.
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CapitalClimate
  |     |   Comment #41
The cost basis is the market value at the time of the withdrawal, which is also the same as the taxable amount of the withdrawal.
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DOA
  |     |   Comment #42
So after you do the withdrawal, the cost basis is most likely always going to be either at a value of less or more than par value. Therefore; when the cd matures in the non IRA brokerage account at par value, is it not true that you will be reporting either a capital loss or capital gain?
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CapitalClimate
  |     |   Comment #46
No, this is the messy part of brokered CDs and taxes. If you buy a new issue and hold to maturity, your gain or loss is generally 0, so no tax issue. If you acquire a "used" CD at a premium, then the excess over par value is amortized bond premium (ABP) and is subtracted from interest income. If the cost basis is less than par value, then the difference is accrued market discount and is added to interest. There's no capital gain or loss in either case, just an adjustment to interest.
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