Brokered CDs can have advantages over CDs that are purchased directly from banks or credit unions. I reviewed both the pros and cons of brokered CDs in this 2012 blog post. One important downside is the risk of brokered CDs especially when dealing with an unfamiliar brokerage firm. An example of this type of risk was recently described by DA reader ChrisCD who mentioned a website listing suspiciously high CD rates. As he described in the DA forum and in his blog post, there are many red flags. I’m not sure if that website is claiming to be offering brokered CDs, but it does raise the important point that when you’re going through a middleman like a brokerage firm for your CDs, it’s critical that the brokerage firm be a reputable deposit broker.
The FDIC recently published a guide on brokered CDs in its Spring Consumer News. Here’s an excerpt with advice about ensuring the reputation of the brokerage firm:
If you’re thinking about an offer from an unfamiliar deposit broker, research that person’s credentials and experience. If the person claims to hold any professional licenses or certifications, verify his or her background and standing with the issuing agency, such as FINRA (the Financial Industry Regulatory Authority at www.finra.org or 1-301-590-6500). In addition, your local Better Business Bureau (http://www.bbb.org/) or your state’s consumer protection office (www.consumeraction.gov/state.shtml) may be able to provide information about whether an individual broker or a company has a history of actual or alleged misconduct.
“We’ve heard multiple examples of individuals wiring funds to someone claiming to be a reputable broker, only to later find that the broker disappeared with all of the money,” said Calvin W. Troup, an FDIC Senior Deposit Insurance Specialist. “Whenever you use a third party to establish a bank deposit account, you place your funds at risk if that person does not put your money in an FDIC-insured bank.”
DA reader pearlbrown found a very useful tool inside the FINRA website called BrokerCheck. Here’s an excerpt from the BrokerCheck overview page:
BrokerCheck is a free tool to help investors research the professional backgrounds of current and former FINRA-registered brokerage firms and brokers, as well as investment adviser firms and representatives. It should be the first resource investors turn to when choosing whether to do business or continue to do business with a particular firm or individual.
When you see suspiciously high CD rates, it may not always be an illegal scam. The FDIC Consumer News describes two ways unscrupulous brokers advertise above-market rates on CDs. In both cases, they are using those high CD rates to get people in the door so they can market them other investments that offer big commissions. And in both cases, those high CD rates are very misleading. Here’s an excerpt from the FDIC describing the first example:
In one recent case, a high-rate brokered CD was issued by a foreign bank and therefore not protected by FDIC deposit insurance. However, the marketing materials for the CD included multiple misleading references to an FDIC-insured bank, and that led consumers to mistakenly believe that the investment was subject to FDIC insurance. In reality, the role of the FDIC-insured bank was limited solely to wiring collected deposits overseas to the issuing bank.
The second example involved the deposit broker advertising short-term CDs with very high rates. The high rate was the result of the broker adding in a bonus to make it look like the CD has a high rate. It’s a bait-and-switch strategy in which the broker is using the CD to attract customers for their other investments which of course have high commissions. I have more details on this scheme in in my post on very high CD rates advertised in newspapers.
The other parts of the FDIC Consumer News article describe other potential issues of brokered CDs. These other risks aren’t as serious as the risk of being scammed out of your money, but they could create some unpleasant surprises if you aren’t aware of them. They include the risk of having some of your deposits not insured, the risk of selling your CDs at a loss before maturity and the risk of delays if the bank holding the brokered CD fails.