I have many CD's in my Fidelity Brokerage account, and I never gave it much thought about the bank I bought it from. Now, I am wondering how stable some of those banks might be. My question is: does anyone know what happens if a bank goes under and I have a CD from in in my brokerage account? Does Fidelity handle it? Do I have to do anything to get my FDIC coverage?
Answers
From FDIC: If you buy a CD directly from a bank and it fails, you will receive an insurance payment faster than you would if you purchased it through a broker. With brokered CDs, the FDIC must first obtain from the broker the name and deposit amount for each CD investor. Then the FDIC will send the deposit insurance check to the broker, who in turn is responsible for distributing the payment to the consumer, and that can result in further delays. Note that the FDIC does not supervise or become involved in the arrangements between brokers and consumers.
This is the risk that causes me to never again own a brokered CD, just too much distance between me and my money.
Although generally safe investment, few people realize that they are not the Depositors nor Certificate Holders.
All they owe is a record entry in Broker Book and Brokerage Statement, while FDIC has nor relation with the Broker and original funds owner.
Thus Brokered CD has the property of both; Certificate of Deposit and Marketable Security.
Which one prevails, I don't want to be made for the Supreme Court to decide.
I decided for myself that Brokered CD is more Investment than Deposit.
Although generally safe, there are plenty of other choices of Low Return - Low Risk Investments
"Brokered CDs offered by Fidelity are FDIC-insured up to $250,000 per account owner, per institution. While banks themselves do not have the ability to exceed FDIC-insurance limits, Fidelity offers many CDs from hundreds of different banks, each of which provides for FDIC protection up to current FDIC limits. By combining a number of these CDs in your Fidelity account, you're able to expand your protection."
You can't do anything with FDIC.
Fidelity is the Custodial Depositor on Record with the Bank and FDIC.
You are the "Beneficiary" Depositor on Record with Fidelity.
FDIC will handle the coverage on behalf of Fidelity.
Fidelity should close your position and pass through FDIC Payment to your Brokerage account where funds are no longer FDIC Insured.
In theory, by the books, and so far on practice.
what happens if both the Bank and the Broker are troubled, we yet had no chance to learn.
to me It screams "Financial advisor" for an answer.
you are trying to invent singular solution to binary problem, doesn't work this way. Try instead single solution for singular problem.
Go back to basic if you can. Play with FDIC calculator
https://edie.fdic.gov/calculator.html
learn that there is NO combination of 1account/3 persons that provides $750K coverage.
For joint account it requires 2 beneficiaries for up to $1M of single account coverage.
I hate doing this in this format, but FDIC coverage converts from linear(1+1) for joint account with (1+1) owners to binary ((0+1)+(0+1)). Once beneficiary is added the coverage is transferred from owner to beneficiary.
There is very specific logic in that, which unfortunately foreign to most of us because this logic is not applicable to other everyday events.
Next is the sequence of the events that triggers the coverage.
FDIC cares less if there are Transfer on Death(TOD) beneficiaries setup for your Brokerage account.
But.. if you find the way to ensure that the Broker sold you CD with 2 beneficiaries in title, it may help you to receive up to $1M of insurance under covered event.
I can only say may because final answer have to come from professionals.
Brokered CD rates usually follow the US treasury rates closely so they can rise and drop pretty quickly. Currently rates have been trending up and we just saw multiple 5% 60 month brokered CD's this week. Pay out of dividends works the same way and depends on the brokered cd's pay schedule (monthly, quarterly, semi-annual, etc) The money is deposited right into the brokerage account.
One caveat with brokered CD's - it's a bit more difficult to break them but not impossible. To break a brokered CD it must be sold on the secondary market. Depending on where rates go the CD could be worth more or less than the price paid for it. For example, I have a 60 month Capital one brokered cd at 4.3% I bought many months ago. Since rates have risen since then the CD is worth considerably less on the CD market. If i wanted to get out of it i would lose about $7,500 as of today. That comes out to an apprx. 8 month EWP. Not bad. Now in a year or two if rates drop below 4.3 the CD will be worth PAR value or more and you can easily exit it so it works both ways.
That being said, even though the "value" of the CD has dropped, that doesnt mean your principal has changed. You will still receive par value on your principal at maturity regardless of whether the cd value has increased or decreased on the secondary market.
Edit: from the FDIC website:
"Each client who owns the CD can qualify for up to at least $250,000 in deposit insurance. This coverage is generally referred to as “pass-through” insurance because it bypasses the broker and is calculated based on the ownership interests of the individual depositors"
We own the custodial account 50/50 with rights of survivorship. I guess the only issue that could come up for FDIC insurance is if one of us dies?
Maybe someone else can offer an opinion and chime in b/c i am really confused now.
Joint brokerage account has 2 owners?
Broker maintains the record books on behalf of its Clients, Specific Certificate is allocated to Specific Brokerage Account, joint or singe.
Record Keeper maintains record books on behalf of the Issuers, Specific Certificate is assigned to Specific Broker.
How in the chain of Client-Broker-Keeper-Issuer-FDIC the information about joint ownership is being passed to FDIC for the purpose of the coverage, one would have to call to FDIC or SIPC to find out.
Sorry, Lou. FDIC can not be explicit in the language of brokerage accounts, it is outside of the area of its concern.
As for joint accounts at the FDIC Membered Banks, the joint accounts are not limited to $500K of Insurance.
Technically, FDIC cares less about account title, FDIC provides the coverage to Depositors, in the language; account owners, co-owners and beneficiaries.
It is recognized for convenience that single account has single owner and joint account has two co-owners with equal rights to the Deposited funds.
Outside of the conventional instances joint account coverage could differ;
If the account co-owner has diseased FDIC coverage limit will be reduced to $250K, six months after co-owner death, even if the account title hasn't been changed.
FDIC will cover joint account to the limit of $1000K if joint account has 4 equal co-owners, provided that you will find the Bank that agrees to setup and maintain such arrangement.
Such instance is likely outside of the concern of this for forum, but I am pretty sure it could be done by Private Banks or by Private Client Banking of Conventional Bank's Wealth Management Services
"Joint Accounts. An individual’s interest in deposits of any one Issuer held under any
form of joint ownership valid under applicable state law may be insured up to $250,000 in the
aggregate, separately and in addition to the $250,000 allowed on other deposits individually
owned by any of the co-owners of such accounts (hereinafter referred to as a “Joint Account”).
For example, a Joint Account owned by two persons would be eligible for insurance coverage of
up to $500,000 ($250,000 for each person), subject to aggregation with each owner’s interests in
other Joint Accounts at the same depository institution. Joint Accounts will be insured separately
from individually owned accounts only if each of the co-owners is an individual person and has a
right of withdrawal on the same basis as the other co-owners"