How Do I Pick Issuers In Brokered CD?

dipan2222 | Mar 26, 2023 | 3 posts since 2023

Hi,

I am looking at CDs section in Fidelity, here I can see various issuers (like KEARNY BANK, OLD NATIONAL BANK, FIRSTBANK PUERTO RICO, WEBSTER BANK, N.A., TRUST BANK, etc.)).

My question is, do I need to consider something or I can blindly pick any which is giving highest coupon rate?

Please suggest.

Thanks

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Answers

w00d00w | Mar 26, 2023 | 360 posts since 2012

i believe for the most part, you can just choose those with the highest coupon rates, with a few caveats:

1. Stay below the FDIC insurance threshold.
2. Purchase at or below par value. It's my understanding that FDIC insurance will not cover the amount above par. So if buying 1K of a brokered CD priced at 101, cost would be $1010, $10 of which would be uninsured.

3. If there is little doubt that you'll need to spend the CD proceeds shortly after maturity, perhaps best to buy from a bank with high health and capitalization grades. Unfortunately, the grades on this site are from 2Q 2022, so the data is a bit stale, but the site author reports they are currently working to update.
4. Another smaller consideration is frequency of interest payments...monthly, quarterly, semi-annually, etc. An issue of personal preference for cash flow.

dipan2222 | Mar 26, 2023 | 3 posts since 2023

Should there be any consideration on, if I buy CD from Bank or brokered CD via Fidelity?
Both are giving similar APY.
One thing I can think is, Bank will give compound. But I am starting with short term, so that wouldn't matter much.

MikeQ | Mar 27, 2023 | 7 posts since 2022

Depends if you want the income as you go or at the end, I am trying to retire in 3 in years and I want it to come out as a lump sum so I bought one from a bank. But I also bought a couple brokered with money that isn't earmarked and I will just reinvest the income as is comes.

Sardonic | Mar 26, 2023 | 34 posts since 2022

Check whether the CD has a "Blue Sky State" provision.

ocsteve | Mar 26, 2023 | 96 posts since 2010

For other readers the blue sky provision relates to states in which the institution is NOT offering the Brokered CDs. This is usually states in which the Bank has branch offices. They do not want their local account holders to get a higher rate on deposits than what they offer locally.

ocsteve | Mar 26, 2023 | 96 posts since 2010

You should also be looking for call protected brokered CDs, with SO (survivor option to put back upon death of depositor). You can sort on Fidelity by call protected status (Yes or No), in addition to highest interest rates. Their brokered CDs are pricing to a head at about 18 month/2Year maturities. There are some 5% 5 Year CDs noted during active trading hours. Odd maturities like 15 months, 33 months, etc. sometimes give a higher yield than strictly 18 months, 3 Years, etc.

If you want to get your feet wet in buying brokered CDs, may want to buy as little as $1k at a time initially. Some issues are available for increments of $100, in case you have some dividend money to invest.

weiss800 | Mar 26, 2023 | 32 posts since 2014

Also, aside from the obvious FDIC coverage, how often is the interested credited. A 5 year CD with interest at maturity will have a different total at maturity than a CD which is credited monthly, semiannually, or yearly.

MAKNYC | Mar 26, 2023 | 323 posts since 2015

In addition to the earlier provided considerations, two additional points:

1) Going the brokered CD route probably excludes the beneficiary opportunity to increase your covered amounts. It does provide the opportunity to sell the CD prior to maturity in the marketplace. Going direct to the financial institution probably would allow beneficiaries to increase coverage amounts. And it would allow early withdrawal subject to EWP penalty. As for which hit would be greater….EWP or potential loss on sale in secondary market…could be either depending on fact pattern

2) As a general rule I would suggest going with the paper offering the best overall terms, usually the interest rate, but could be other factors, regardless of the name or health of the entity. This of course assumes you remain under coverage limits. Barring a U.S. Government default, you would be covered against capital loss, so as long as you are receiving benefit go with the higher benefit paper. But one caveat…if the income stream is of critical importance then perhaps going with a safer, but lower yielding opportunity might be advisable. The risk is not in capital loss, but in change of terms. In the event of a regulator induced action such as a liquidation or sale there is a non-zero probability that the terms offered you on remaining in that relationship could be modified. You would have the option to not accept them, but that still means losing your agreed upon terms and receiving your capital back prematurely. So if opening a 5% CD at an imminently failing entity would cause you real hardship if the funds were returned to you prematurely (as opposed to let’s say 5 years), then it’s reasonable to accept a lower yield but at a stronger institution. There would be no way to predict such an outcome prior to it actually taking place. In 2008/09 I ran over to Washington Mutual branches to open up well above market rate 5% CD’s despite knowing of their imminent failure. In that case JPM acquired them and honored the rates, but they could’ve just as well said no, here’s your expensive money back.

dipan2222 | Mar 26, 2023 | 3 posts since 2023

This is very point and I agree.
So far, as I am just starting, I will be doing two short term CDs, 3 months and rest half in 6 months. Later I will think, how I do it further. Interest rates are not much different, harldy 0.15% difference between 3 months vs 1 year CD.
Fed recently hiked rates and probably it may happen again in another 2-3 months. May be, I can see better rates at that time and I can get new CD at better rate. But it is just assumption. With my limited knowledge I am just going safely and short-term.
Thanks

choice1 | Mar 27, 2023 | 370 posts since 2023

2222…I reread your inquiry and state you should NOT be buying brokered CDs. U are seemingly going over your head…sorry but that is what I see. You do not need a brokerage account! Go to a brick and mortar FI and purchase a CD and/or get a fee (if any) only advisor. Good luck!

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