Brokered Cds?

BillA
  |     |   11 posts since 2018

Curious as to why I'm just discovering brokered CDs through my investment accounts. The rates seem significantly higher - an example:

- a 14m Ally Select CD quoted today on this site is 1.65%

- the 12m CD on Ally's site quoted at 1.40%

- and a 12m CD from Ally on Schwab is at 2.00%.

These are new issues and commission free. And no opening/closing accounts and multiple fund transfers. This sure seems both more lucrative and easier. What am I missing?



Answers
Ken Tumin
  |     |   6,127 posts since 2009
In our biweekly CD summary, we do include the top non-callable brokered CDs from Fidelity and Vanguard for each term category.

https://www.depositaccounts.com/blog/cd-rates-survey/

As you mentioned, most brokered CD rates are now higher than direct CDs with similar maturities. However, some of the top direct CDs are starting to catch up (like at USALLIANCE and Connexus).

One important downside to brokered CDs is that to receive the funds before maturity, you have to sell the CD (for cases when you need the funds or want to deposit the funds into a higher-rate account.) When rates are rising, you'll probably have to sell at a loss. Most direct CDs have fixed early withdrawal penalties (EWPs). Some banks and CUs have pretty mild EWPs. Ally Bank is one example.

This old DA post from a long-time reader provided several pros and cons of brokered CDs:

https://www.depositaccounts.com/blog/notes-personal-ira-cd-investing-longtime-reader-2.html
FirstNation
  |     |   69 posts since 2021
Thanks for reposting the link.

The article was definitely worth re-reading - as was the exchange of useful information in the comments section.
It made me nostalgic for when comments on this site actually provided added value to the original article.
Even back then it appears that some people were insistent on dragging us all into the black hole of political diatribes.

Especially interesting was that the brokerage firms use the "market value" of the CD's for tax reporting purposes.
Brokerage firms also use the "market value" of TIPS for tax reporting purposes.
If you've got either CD's or TIPS in a retirement account that require that an RMD be taken, it directly affects the RMD amount.

The "market value" can actually be higher than the current book value of the TIPS (purchase price times the inflation index).
That can result in having to take a larger RMD than what would be expected based upon the "book value".
Of course, if the market value is lower, it would cause the RMD to be lower than on would expect.
Infinityy
  |     |   66 posts since 2020
Also, the bid/ask spreads on brokered CD's are large, around $10 per $1,000 face value in my experience. Plus you'll pay a commission to your brokerage firm to execute the trade.
w00d00w
  |     |   31 posts since 2012
so in this instance, the cost of selling the brokered CD would be $110/$10000 (including the $10/$10000 trading fee). take a 2% non-brokered CD with a 6 month EWD...the cost of breaking that would be around $100/$10000. for this comparison, market conditions that increase the amount of EWD penalty (higher interest rate, more punitive EWD penalty) can tip the scales in favor of the brokered CD
Infinityy
  |     |   66 posts since 2020
When you sell a brokered CD before maturity, you also need to account for the difference in interest rates between when you bought the CD and when you sold it. If rates have gone up, the value of the CD will be even lower, increasing your loss beyond $10 per $1000 face value
Modenaro
  |     |   8 posts since 2022
Correct me if I am wrong, but new release brokered CDs have a set price. No bid and ask price.  Also, interest is not compounded. But some pay monthly , semi annually, or annually. Making them great for IRA distributions. 

You can sell with a loss. Especially in a rising rate environment.  But when rates are declining you can often sell with no loss. I found this in the link posted above?

 "Brokered CDs usually carry lower rates of interest than direct CDs of the same maturity."
I have been getting about the same or better rates on brokered CD's. One thing is, they are way ahead of the curve compared to (Banks & CU's) . When rates are going up, and down. Just my take on it,,
Infinityy
  |     |   66 posts since 2020
Correct, you only encounter bid/ask spreads if you trade brokered CD's on the secondary market. Also Schwab/Fidelity don't charge a commission on new brokered CD's, but do charge a commission for secondary market trades
Modenaro
  |     |   8 posts since 2022
Just trying to set things straight. There is a lot of misinformation in many of these posts. Here...
Choice
  |     |   684 posts since 2020
Brick and mortar, safe deposit boxes, real people, etc
RxTx
  |     |   4 posts since 2018
Brokered CDs quote APR, and do not compound interest.

Retail/Direct CDs quote APY, which includes compounded interest.

For 1 year, APR equals APY, so the 12 month brokered CD is the better deal.

The 12 month CD on Ally's site will accumulate interest throughout the year, so they will report the interest accumulated in 2022 as 2022 income. The brokered CD pays at maturity next year so the entire interest will be 2023 income.
Ally6770
  |     |   3,131 posts since 2010
Be careful if you invest a large some of money. You do not know which bank or credit union your money will be in with a brokered CD. If you chase rates you may be over the limit for insurance.
ocsteve
  |     |   27 posts since 2010
Your comment is not correct. I have purchased several brokered CDs from Fidelity Investments and when you choose which offering you want and the amount, you KNOW the institution name. Fidelity only carries brokered CDs from banks, no CUs. Better check your sources for information.
Ally6770
  |     |   3,131 posts since 2010
My understanding came from a comment in this blog made during the 2008 banking crisis when many banks were closed. There were people with their own CD's and with the brokered CD's they had that were invested in many institutions and they were over the FDIC insured limit when combined and lost money. Because I have never spent a CD when they matured except when we bought and paid cash for a home, but added to each when they matured since we first started in the 70's and shopped rates I now tend to now combine the new CD's and IRA's that will be at or close to the limit at maturity. I have never purchased a brokered CD because I thought this blog stated that each individual brokered CD was invested in several institutions even though you purchased them from one place. I assumed it was still that way. Because I still chase rates I have CD's in multiple places though fewer now that I have been consolidating them and have been gifting to the children since the 90's.
If you know before investing what banks the institutions put your money in with a brokered CD that was not the impression I was left with during the bank closings. I stand corrected. Thank you. I may be able to use this information in the future.
FrankSavage
  |     |   28 posts since 2017
An example from Vanguard 1-3 month brokered CD's:

United Fidelity Bk Fsb 1.90% Matures 10/14/2022
Payment frequency: Interest at maturity Settles 7/15/2022
Midfirst Bank 1.85% Matures 10/27/2022
Payment frequency: Interest at maturity Settles 7/27/2022
The Bank Of Tioga 1.80% Matures 10/28/2022
Payment frequency: Monthly Settles 7/29/2022
Beal Bk Usa Las Vegas Nev 1.80% Matures 10/19/2022
Payment frequency: Interest at maturity Settles 7/20/2022
Discover Bank 1.80% Matures 10/19/2022
Payment frequency: Interest at maturity Settles 7/20/2022
Luther Burbank Svgs Santa Rosa Calif 1.80% Matures 10/28/2022
Payment frequency: Interest at maturity Settles 7/29/2022
Etc.
beecia
  |     |   13 posts since 2019
How did these compare with rates of non-brokered CDs? At Ameritrade, the only five-year CDs that are comparable to or higher than CFG's current 5-year APY of 3.65 are
CDs that are callable in three months from now. Does Vanguard offer anything better? Thanks!
RichardW
  |     |   81 posts since 2019
beecia…as of 4:30 PM EDT today, here are the highest rates offered on 5-year, new issue, non-callable brokered CDs:
3.40% (from 4 banks) offered at Vanguard
3.40% (from 3 banks) offered at Fidelity
3.40% (from 3 banks) offered at TD Ameritrade
Tomorrow the rates may be higher or lower. The rates will probably rise as we approach 9/21/2022.
beecia
  |     |   13 posts since 2019
Thank you, RichardW!
Ally6770
  |     |   3,131 posts since 2010
We only had brokered CD's at a savings and loan probably in the 80's as interest rates were coming down on CD's. They were callable but still we were able to do much better with those than with regular CD's. With 2 boys in college we did not have a lot of money back then.
alan1
  |     |   697 posts since 2015
Ally6770 -- Brokered CDs can be rather complex instruments. They are not necessarily FDIC insured.

from FINRA (Financial Industry Regulatory Authority):

Brokered CDs—Not Always FDIC Insured

You may also be offered a brokered CD by a stockbroker or other investment professional who serves as a deposit broker for the issuing bank. Brokered CDs may have a longer holding period than a CD you purchase directly from a bank, and they may be more complex and carry more risk. Although most brokered CDs are bank products, some may be securities—and won't be FDIC insured.
(bold in original)

https://www.finra.org/investors/learn-to-invest/types-investments/bank-products/certificates-deposit...

From Bankrate article dated April 14, 2022:

Are brokered CDs FDIC insured?

Brokered CDs are typically insured by the FDIC up to $250,000 each. The fine print, however, is that not all brokerage firms partner with federally insured banks. To get FDIC coverage, the brokered CD must be from a federally insured bank.
(bold in original)

https://www.bankrate.com/banking/cds/what-are-brokered-cds/

As usual, avoid one-size-fits-all assertions and advice on complex financial instruments.
ocsteve stated when responding to you: "Better check your sources for information." I concur, and have provided links to the sources I quoted, so you can check out the entirety of those articles.

I've bought and sold numerous brokered CDs using major brokerage firms. Those firms did partner with federally insured institutions.

But my experience, and those institutions (no matter how large) constitute only a portion of the world of brokered CDs.

As the FDIC stated, in a rather different context: "When a Broker Offers a Bank CD: It Pays to Do Some Research".
https://www.fdic.gov/consumers/consumer/news/cnspr13/cdsfrombrokers.html

(The FDIC article deals with fraud and shady practices in the world of brokered CDs, as well as some issues involving deposit insurance. It may be of use to people considering investing in brokered CDs.)
FrankSavage
  |     |   28 posts since 2017
In case any are interested, Vanguard includes the following on their brokered CD page:

NOTE
Vanguard Brokerage only offers CDs from banks across the United States that are all FDIC insured.

Fidelity includes a similar comment.
lou
  |     |   812 posts since 2010
Another problem: If you have $1 million to invest, you will need to buy at least 4 separate brokerage CDs to maintain full insurance. With non-brokerage CDs, you could purchase the CD from one financial institution and be fully insured. That's a big advantage.
Modenaro
  |     |   8 posts since 2022
Its just the opposite as you posted. Buy (4) 250k brokered CD's and you are covered.
Maybe I am not getting it? You can invest over 250k in either. But are only insured to 250k by the FDIC. So buy a Goldman Sachs CD, Morgan Stanley, Discover bank and Citizens bank CD from a single brokerage and you are covered. On top of better rates, thats the big advantage to brokered Cd's. Am not an authority, but all new issue CDs at Charles Schwab CD's are insured by the FDIC. 
lou
  |     |   812 posts since 2010
Read my comment again.
Modenaro
  |     |   8 posts since 2022
I did. How can you buy 1m as an individual from a single bank and be insured?
When the ins is 250k. Thanks.
calwatch
  |     |   14 posts since 2018
Through beneficiaries. The POD account allows for up to five unique beneficiaries to get $250k per beneficiary named, as long as they are living people or a charity or non profit. https://www.fdic.gov/resources/deposit-insurance/brochures/documents/your-insured-deposits-english.pdf
RichardW
  |     |   81 posts since 2019
Modenaro…In addition to the reply by calwatch, you may also find these two older posts by Ken Tumin helpful:
https://www.depositaccounts.com/blog/2011/05/maximizing-your-fdic-coverage-with-beneficiaries.html
https://www.depositaccounts.com/blog/insuring-bank-deposits-over-250000-with-multiple-ownership-categories.html
Modenaro
  |     |   8 posts since 2022
I am aware of that. Have been doing it that way for years. Brokered CD's also have beneficiaries'. "With non-brokerage CDs, you could purchase the CD from one financial institution and be fully insured. That's a big advantage."
Maybe you can explain the big advantage quoted above? Just not seeing it. Thanks
lou
  |     |   812 posts since 2010
Who are the beneficiaries of a brokerage CD for FDIC insurance purposes? Is it the primary beneficiaries of the brokerage account? I am not really sure. Are you? Regardless, even if it is, you can't vary the beneficiaries for the different CDs like you can when you buy direct from the bank/credit union. Big advantage over brokerage CDs.
Beammmm
  |     |   3 posts since 2022
Still need clarification. Brokered CDs are insured up to $250K. Is this per issued Bank or total per brokerage? Let’s say you purchased Brokered CD issued by 3 different Banks from Fidelity brokerage , each one is $250K. Do you have all these 3 CDs completely insured or only up to $250K. Thanks
MAKNYC
  |     |   105 posts since 2015
Beammmm In your example it would be per issuing bank, so $750k. But the same calculus would apply thru multiple brokerage accounts…..for example if you bought $250k Discover Bank CD @ Fidelity and $250k Discover Bank CD @ Schwab that would mean you have $500k @ Discover Bank so potentially at risk.
Modenaro
  |     |   8 posts since 2022
"Beammmm In your example it would be per issuing bank, so $750k. But the same calculus would apply thru multiple brokerage accounts…..for example if you bought $250k Discover Bank CD @ Fidelity and $250k Discover Bank CD @ Schwab that would mean you have $500k @ Discover Bank so potentially at risk.D. "..........................................................................................................................................
True. In that case adding a beneficiary with a click of a button on that Discover Bank brokered CD would be required. The big plus, is being able to do that a dozen times at a single brokerage. Like Schwab or Fidelity.  As there are many many institutions offering FDIC brokered  CD's. That all allow beneficiaries to take you over 250k each. Just like a single bank. 
RichardW
  |     |   81 posts since 2019
Modenaro…It wasn’t obvious from your 8/5/2022 comment above, but I assume that you are aware of the fact that at investment firms such as Fidelity and Vanguard, the beneficiaries you designate in your brokerage account are applicable to each brokered CD you purchase in that account. For example, if you designate your son as your sole beneficiary of your Fidelity XYZ account. Your son will be the sole beneficiary of each brokered CD you purchase with your Fidelity XYZ brokerage account. You can’t have your son as the sole beneficiary of one brokered CD you bought with your Fidelity XYZ account, and have your daughter be the sole beneficiary of another brokered CD you bought with your Fidelity XYZ account. However, if you opened a second Fidelity brokerage account ABC, and designated your daughter as your sole beneficiary of your Fidelity ABC account, then she will be the sole beneficiary of each brokered CD you purchase with your Fidelity ABC account. I don’t have a Schwab brokerage account, but I believe the beneficiary designation policies are similar.
lou
  |     |   812 posts since 2010
RichardW, would multiple beneficiaries for a brokerage account increase FDIC insurance for one brokerage CD. Think before giving the answer.
Hooked
  |     |   130 posts since 2019
“Think before giving the answer”? How rude.
RichardW
  |     |   81 posts since 2019
lou...Think before I answer? But breaking an old habit is very difficult. For a direct CD with 5 or fewer beneficiaries, the owner’s deposits are FDIC insured up to $250,000 for each unique beneficiary. In the case of a direct CD with one owner and 5 unique beneficiaries it could be insured up to $1,250,000. The beneficiaries of a direct CD are maintained in the CD account records of the bank. However, with a brokerage CD the beneficiaries are maintained in the account records of the brokerage firm, not in account records of the bank. I’ll guess that there is a FDIC policy which prohibits a brokerage CD from being insured up to $250,000 for each unique beneficiary. Therefore, I’ll assume that multiple beneficiaries for a brokerage account would not increase FDIC insurance for one brokerage CD. So, what is FDIC guru lou’s answer and explanation?
lou
  |     |   812 posts since 2010
I agree with your answer. How many people or posters on this site do you think know this? Interestingly, I can't find any independent source that speaks about this. I have searched FDIC and NCUA literature and there is nothing.
Ally6770
  |     |   3,131 posts since 2010
During the period when we had so many bank closings, if I remember correctly, the comments in Ken's blog stated that people who had CD's had their money the next morning after the bank closed the night before. The people who had brokered CD's had to wait to see if their brokered CD even though they were purchased from different brokerages or different banks some of the funds were invested in the same banks and they lost some of their money because of being over the limits for insurance. Even though the brokered CD's were purchased at different places sometimes they were invested in the same bank. Because I am consolidating funds, am a widow and have 2 children, I make sure that the each of the CD's never get over insurance limits. I am so very risk adverse. I got out of the market the last years of the 90's when everyone made 20, 30 and even close to 40%. I could not sleep. It was all momentum buying. The balance sheets of the companies were not any better. I could not sleep and was checking my funds every night after closing. But my situation was different than most people. I had 2 boys in college, and a disabled husband, and working 2 jobs.
garyh1961
  |     |   521 posts since 2017
If you tie up long term 5 or 10 years if you need to sell you will probably lose money. It goes to secondary market. Test the waters with a 6 month CD. See if you have any issues. Should not. When it matures will get out back in your account with interest. 5 or 10 years are a long time to not be able to access your dollars
FirstNation
  |     |   69 posts since 2021
Some credit unions allow you to withdraw accrued dividends on a CD without incurring the usual EWP.
That's something you'll never see from a brokered CD.
alan1
  |     |   697 posts since 2015
The reason "That's something you'll never see from a brokered CD" is that brokered CDs pay out the interest periodically (semi-annually is most common), rather than having interest retained in a certificate. So there's no need to withdraw dividends from a brokered CD, and no penalty or fee for receiving periodic interest payments.

Many banks and credit unions do permit account holders to withdraw credited CD interest without penalty. I have never encountered a CD (other than a no-penalty CD) where you could make a penalty-free withdrawal of interest that had accrued, but had not yet been credited.

The distinction between credited and paid interest, on the one hand, and accrued interest, on the other, is often overlooked.

Investopedia gives a pretty good explanation of accrued interest:

What Is Accrued Interest?

In accounting, accrued interest refers to the amount of interest that has been incurred, as of a specific date, on a loan or other financial obligation but has not yet been paid out. Accrued interest can either be in the form of accrued interest revenue, for the lender, or accrued interest expense, for the borrower.

The term accrued interest also refers to the amount of bond interest that has accumulated since the last time a bond interest payment was made.
(emphasis added)

full at https://www.investopedia.com/terms/a/accruedinterest.asp
Ally6770
  |     |   3,131 posts since 2010
With the ones we had with the savings and loan you had a book similar to a savings book they had in the 80's and every month they added that to your book if you brought it in. So you didn't go in for a couple of months when they put it in the machine it would up date the interest for each month automatically. When it matured or if it was called you were paid interest until the day you cashed it in. I never sold one early so I don't know how that would work.


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