Brokerage Certificates of Deposit

Brokerage Certificates of Deposit

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Although most people think that you can only buy CDs from a bank, brokerages also sell CDs and they may offer you some advantages.

Banks generally issue large blocks of CDs to brokerages, who then break the blocks up to re-sell to their customers. Since the brokerages purchase the CDs in large blocks, they may be able to negotiate higher rates than an individual customer can get from a bank. The brokerages generally re-sell the CDs to their customers without fees.

Brokerages re-sell these CDs without fees because they want to keep their clients money within the brokerage. When the CD expires, the money is still with them, and can be re-invested in stocks, bonds, or another product that they offer.

A Brokerage CD is usually FDIC insured by the original issuing bank.

For consumers, a brokerage CD offers the following benefits:

  • Convenience. The convenience of buying more than $100,000 in CDs from one location and keeping all of the money FDIC insured. A consumer could buy three $100,000 CDs from three different banks using one brokerage. Because the CDs were originated from three different banks, the full amount would be FDIC insured. These CDs are then housed in one place and not at three separate banks.
  • Potentially Higher Rates. Brokerage CDs generally pay above market rates because the brokerages have negotiating power with the banks
  • Liquidity. Brokerage CDs may be able to be resold before their maturity date (instead of redeemed), allowing you to withdraw your money without penalty. Depending on current interest rates, your CD may be worth more or less than what you paid for it. .

In addition to the advantages, we saw one huge disadvantage to brokered CDs in 2008, 2009 and 2010 as many banks went under and were acquired by other banks through FDIC-managed sales or transformations.  CDs purchased directly with banks like IndyMac or Wachovia were transferred to CDs with the same terms from the acquiring / resulting institution.  However, brokered CDs were ordinarily paid out on the date the bank ceased to exist.  As we were in a falling interest rate environment, proceeds from brokered CDs could not be readily invested at the same rate.

In addition, brokerages often offer more exotic CD products. Below are some of the different types of CDs offered by brokerages:

Callable CD

Callable CDs usually offer a higher rate of interest because the issuer reserves the right to buy them back at some point in the future. For example, if interest rates drop, the issuing bank may decide that it can borrow money for less than it is paying on some of its CDs, and it may buy back those CDs. Most callable CDs come with at least a year of call protection.

If you want to lock your money in for a certain period of time, and believe interest rates are going to rise in the future, these may be good bets.  You are effectively "selling" the call feature in return for which you will receive a higher rate of return.

Zero Coupon CD

Zero Coupon CDs do not pay interest over the term of the CD or have a coupon. Instead, you buy the CD for discount over its face value and when it matures you get the full face value. So, you might buy a 5-year, $20,000 CD for $15,000 and when the CD matures you would get the full $20,000.

The biggest disadvantage to so-called Zeros is that the income is taxed annually by the IRS. So you will need to pay taxes on the income you are earning without receiving the income until the maturity date. Zeros therefore are most effective when held in a tax-exempt account.

Secondaries

These are CDs that you can purchase from others on the secondary market. The prices of these CDs depend on the direction of interest rates, the credit worthiness of the issuing bank, and other competitive products.

Selling a Brokerage CD

If you plan on buying Brokerage CDs with the intent of selling them, then you should consider several factors.

1) What do you think will happen with interest rates? If interest rates drop, the value of your CD will drop with it.

2) The credit worthiness of the issuing bank. A large percentage of secondary market brokerage CDs are purchased by large institutions who only want CDs issued from highly rates banks, regardless of whether they are FDIC insured. 

3) Ask the broker to check the value of similar issues on the secondary market.

In general, as with all cash equivalent investments, be sure to run the numbers and take into account the other benefits and drawbacks of the investment before making a decision. You should also talk to a certified investing professional who can help you evaluate your choices.

 

 

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Today's Highest Online CD Rates

Bank Product Term Interest Rate (APY)
CFG Bank 1-Year 0.67% APY with $500 minimum
Primary Bank 1-Year 0.65% APY with $1,000 minimum
Comenity Direct 1-Year 0.63% APY with $1,500 minimum
Comenity Direct 3-Year 0.85% APY with $1,500 minimum
First Internet Bank of Indiana 3-Year 0.81% APY with $1,000 minimum
Connexus 3-Year 0.75% APY with $5,000 minimum
Primary Bank 5-Year 1.15% APY with $1,000 minimum
Connexus 5-Year 1.00% APY with $5,000 minimum
First Internet Bank of Indiana 5-Year 0.96% APY with $1,000 minimum

See More Online CD Rates →

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