Buying Brokered CDs from Banks on the Brink Seems Like a Bad Strategy

Those owning full-service brokerage accounts at institutions like Morgan Stanley have probably received calls this week from their brokers. In addition to calming you down about the crisis around the banks, many of these brokers’ calls are designed to pitch you on brokered CDs with attractive 1 year (or longer) rates. Those with online brokerage accounts can also see brokered CDs offerings through the interface.

The problem with many of these brokered CDs is that they are being issued by banks that you had not heard of before the collapse of Silicon Valley Bank and Signature Bank. Your only familiarity with these banks may come from their names crossing the CNBC tickertape every three minutes showing that the stocks are down something like 15 to 20% in the day.

Even if you are staying within FDIC limits, buying these brokered CDs is not a no-brainer. It is actually a fairly risky proposition.

A savings account or CD opened directly with a bank is insured to FDIC limits and your funds are made available the following day by the FDIC after a bank closure or sale.

A brokered CD, unlike an account opened directly with a bank, is ordinarily not held directly in your name. It can take weeks or even months for the FDIC to review the brokerage ledgers and make you whole up to FDIC limits. In the event of a bank failure, you are not only not getting the high interest rate you had been offered but you are losing the time value of money just waiting to recover your principal.

Even in the event that a failed bank is acquired in a transaction arranged by the FDIC, the acquiring bank may chose not to assume brokered CDs.

It all seems especially silly to chase brokered CDs from distressed institutions when you realize that you can lock in great CDs directly from banks that aren’t distressed today, where you are more likely to get the rate for the full term and where you also get your funds up to FDIC limits the next day in the unlikely event of a failure.

Direct bank CDs also offer clear and transparent early withdrawal terms (versus brokered CDs where you need to sell to the market if you need your money before maturity).

Compare today’s best online CD rates here.

See CD rates where you live here.