One of the ways that people attempt to boost their earnings from cash products is to make use of CDs. Certificates of Deposit provide you with a safe place to park your cash -- as long as your bank is FDIC insured. A CD offers you a fixed rate of return, as long as you keep your money in the CD for the term specified by the financial institution. Often, your interest yield is higher than what you would receive if you put your money in a savings account. However, the trade off is that if you withdraw your money before the specified term, you will have to pay a penalty.
Even with the higher yields that CDs offer relative to many other cash products, they still do not provide impressive returns; they are mainly used as a way to preserve capital. For those interested in the safety and stability of CDs, but are looking for slightly higher yields, it is possible to find higher rates by using brokered CDs.
What Are Brokered CDs?
Most people think of going to the bank or credit union and getting a CD. In such situations, you have access only to the products and rates offered by that particular financial institution. If you are looking for a wider range of offerings, you can actually go to a brokerage and find CDs. Brokered CDs usually have higher interest rates than CDs you find through local banks. This is because brokerages have access to CDs from a wide variety of banks in a number of locations.
Brokerages often get CDs in large denominations, and these larger denominations come with higher yields than lower denomination CDs. Brokerages can then break these large CDs into smaller issues, that consumers can afford. The rates on these brokered CDs are usually reasonably generous, providing you with a higher yield. Some brokerages require a minimum order, though, that can be as high as $10,000. If you have a large sum of money that you want to keep in a less risky place, with a decent cash yield, brokered CDs can be a good choice.
Brokered CDs are often callable. This means that banks can recall the CD within a certain time period. You get your principal back, and any interest you have earned, but the CD is reclaimed by the bank. This usually happens when interest rates are dropping. That way the bank can call the CD with the higher yield, and issue new CDs with low yields that reflect current rates. When you get a brokered CD, make sure you understand whether or not a call is possible, and the terms of the call.
When purchasing brokered CDs, you do need to be aware of the costs. First of all, you want to make sure that the original issuing financial institution is properly insured. This way, if the bank fails, you don’t lose your money. Be aware, though, that it might take you longer to get access to your money if the bank fails, since you’ve used the extra step of going through a broker, rather than getting the CD directly from the financial institution.
Another concern relates to the fees charged. While many brokerages will not charge a fee for newly issued CDs, some will charge a transaction fee. Additionally, if you buy through a financial planner, or some other advisor, you might have to pay a fee. Another consideration is that you may have an agreement to pay a certain percentage of assets under management. It depends on the arrangements made. Be sure to understand how it works before you decide to purchase a brokered CD. You want ensure that your brokered CD is offering better real returns than a more traditional CD. If there are fees that cut into what you are earning, the higher yield of a brokered CD may not be worth it. Be sure to crunch the numbers.
Also double check your broker. If you are new to investing, you might consider going with well known brokerages. While considered mostly risk free, CDs still do come with risks, especially brokered CDs. Be sure that you run a background check on your broker, and make sure that he or she is properly licensed and reputable.
Brokered CDs can also be bought and sold on the secondary market. Indeed, this is one of the things that brokerages do. It is possible to buy and sell brokered CDs in a manner similar to trading fixed income investments. If you decide to withdraw your money early from a brokered CD, you are not charged a prepayment penalty; instead, the brokerage tries to sell your CD on the secondary market. However, it is important to note that, while early withdrawal penalties won’t apply, you could still lose money.
On the secondary market, CDs are often bought and sold based on demand from the market. If your CD offers a higher rate than new CDs, then you will probably find buyers for it, and be able to get at least face value for the CD. However, if interests are moving higher, investors won’t want to pay as much for your CD, with its lower yields. As a result, you can actually lose money on CDs when you sell on the secondary market, since you may not get face value for your CD.
Finding Your Own High Yield CD
If you already have an investment account, adding brokered CDs might not be a bad idea. It provides a centralized place for you to keep your investments, and can simplify matters. However, with the Internet, and the ability to access different banks across the country, it may not be necessary to go through a brokerage to find the highest rates from across the country. Many web sites, including Deposit Accounts, offer lists of the best yielding CDs for different lengths of time, and different amounts. The wide accessibility of technology has made it possible for you to do the research on your own, and find your own CD, without the assistance of a broker. However, you do need to be careful, and double check to ensure that you are working with a reputable financial institution.