Why buy a CD with a brokerage firm?

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
Topic Author
LookinAround
Posts: 133
Joined: Tue Mar 27, 2018 5:41 am
Location: Chicagoland

Why buy a CD with a brokerage firm?

Post by LookinAround » Wed Apr 17, 2019 7:56 am

I've always opened CDs directly with banks but recently looked at buying them through my brokerage accounts (Vanguard and Schwab).

Today, Apr 17, 2019 I can get a 1 yr CD at TIAA bank at APY 2.75% and Discover Bank @ 2.65%

Vanguard and Schwab offer 1 year CDs at 2.4%. Why buy CDs through one's brokerage account? Do they sometimes offer equal or higher rates then direct from banks?

k3vb0t
Posts: 378
Joined: Mon Jun 02, 2014 4:42 pm

Re: Why buy a CD with a brokerage firm?

Post by k3vb0t » Wed Apr 17, 2019 8:05 am

Sometimes better deals can be found through a brokerage than what you can find locally/available nationally from a bank.

Sometimes you want to have fixed income in a traditional or Roth IRA in one account rather than having to transfer funds to some other bank and open a new IRA account there.

User avatar
RickBoglehead
Posts: 5608
Joined: Wed Feb 14, 2018 9:10 am
Location: In a house

Re: Why buy a CD with a brokerage firm?

Post by RickBoglehead » Wed Apr 17, 2019 8:12 am

Sometimes you don't want to go through the trouble of opening an account somewhere new, having to mail documents (sometimes), having to remember to turn off auto renew, having to remember to transfer funds back out, having to remember to close accounts to not incur fees, having no interest paid while funds are in transit, ...

2.75% vs. 2.4% is 14.8% more interest, assuming daily compounding (which it may not be).

On $10,000, for one year, with daily compounding, the difference is $35.91. Unless you're moving a lot of money, is that really worth your time and effort?

I moved large sums back in October to Ally for $two $1,000 bonuses. When the period ended, I moved the sums back out because Ally wasn't competitive. But I already had accounts at Ally, just had to open CDs.
Avid user of forums on variety of interests-financial, home brewing, F-150, PHEV, home repair, etc. Enjoy learning & passing on knowledge. It's PRINCIPAL, not PRINCIPLE. I ADVISE you to seek ADVICE.

Broken Man 1999
Posts: 3795
Joined: Wed Apr 08, 2015 11:31 am

Re: Why buy a CD with a brokerage firm?

Post by Broken Man 1999 » Wed Apr 17, 2019 8:30 am

In no particular order...

- wider range of lengths of CDs available.
- amounts over $250,000 easy to accommodate to ensure FDIC protection is applicable.
- simplicity, no opening additional financial accounts as you try to find best rate every time you invest in a CD.
- ease of administering your portfolio as assets are in one location.
- buying and selling very simple, requires less time, thus ideal for lazy individuals (like myself).
- reinvesting funds from matured CDs very simple, and very quick.
- your financial/personal info isn't constantly being provided to new entities, thus reducing additional risks of security breaches.


Broken Man 1999
Last edited by Broken Man 1999 on Wed Apr 17, 2019 8:32 am, edited 1 time in total.
“If I cannot drink Bourbon and smoke cigars in Heaven than I shall not go. " -Mark Twain

User avatar
Sandtrap
Posts: 8705
Joined: Sat Nov 26, 2016 6:32 pm
Location: Hawaii No Ka Oi , N. Arizona

Re: Why buy a CD with a brokerage firm?

Post by Sandtrap » Wed Apr 17, 2019 8:31 am

To me, the value of CD's at a brokerage is that there is no "auto renew" "window", everything goes into the brokerage sweep account. Thus, I don't have to keep track of it.
Also, a wide variety available to me. (diversification of fixed/not just CD's)
Simple.
:D
Wiki Bogleheads Wiki: Everything You Need to Know

flah
Posts: 43
Joined: Tue Feb 23, 2016 9:20 am

Re: Why buy a CD with a brokerage firm?

Post by flah » Wed Apr 17, 2019 8:52 am

LookinAround wrote:
Wed Apr 17, 2019 7:56 am
I've always opened CDs directly with banks but recently looked at buying them through my brokerage accounts (Vanguard and Schwab).

Today, Apr 17, 2019 I can get a 1 yr CD at TIAA bank at APY 2.75% and Discover Bank @ 2.65%

Vanguard and Schwab offer 1 year CDs at 2.4%. Why buy CDs through one's brokerage account? Do they sometimes offer equal or higher rates then direct from banks?
For 1 year CD, TIAA/Discover Bank are a better deal if held to maturity.

Direct CDs pay APY, which includes compound interest. Brokered CDs pay APR and will pay out interest at schedule, but do not compound interest. Which one pays out more depends on the term. For example, you would need a 5 YR brokered CD at 3.30% APR to return the same as a 5 YR direct CD at 3.10% APY.

With brokered CDs you get the interest at schedule, which is usually before maturity for multiyear CDs, so you can save that in more CDs or a savings account and earn more interest. But the return on a deposit account in which to put that future interest depends on future rates so it is an unknown value for comparing which of direct or brokered is better.

If the 1 YR brokered CD pays interest only at maturity, it moves the entire interest income out to the next tax year. The bank CDs will probably pay some portion of the interest this tax year.

You can sell brokered CDs before maturity. You can sell at a profit if the prevailing rates have dropped since you bought it. If prevailing rates have risen, you will have to sell at a loss. How much you will lose is not predictable. With direct CDs, the early withdrawal penalty is specified up front in the terms of the CD, so the loss is predictable.

User avatar
dm200
Posts: 22959
Joined: Mon Feb 26, 2007 2:21 pm
Location: Washington DC area

Re: Why buy a CD with a brokerage firm?

Post by dm200 » Wed Apr 17, 2019 9:03 am

One advantage of brokered CDs is being able to have all of your CD investments FDIC insured and in one place (for convenience, etc.)

livesoft
Posts: 69629
Joined: Thu Mar 01, 2007 8:00 pm

Re: Why buy a CD with a brokerage firm?

Post by livesoft » Wed Apr 17, 2019 9:06 am

One might ask as well: Why buy a CD at all from anywhere?
Wiki This signature message sponsored by sscritic: Learn to fish.

123
Posts: 5438
Joined: Fri Oct 12, 2012 3:55 pm

Re: Why buy a CD with a brokerage firm?

Post by 123 » Wed Apr 17, 2019 9:16 am

Brokerage CDs facilitate investing in CDs for a lot of people. I have assisted older relatives over the years with their accounts and it becomes tedious and an annoyance for them if they have to have to deal with paperwork to open and close CDs with various banks. Plus they have the reinvestment risk of an automatic rollover with non-brokerage CDs. Yes they have to accept a somewhat lower yield with a brokerage CD but than the "best" at the moment but they can move money faster and with great ease.
The closest helping hand is at the end of your own arm.

California88
Posts: 51
Joined: Sun Feb 03, 2019 12:08 pm

Re: Why buy a CD with a brokerage firm?

Post by California88 » Wed Apr 17, 2019 9:17 am

Going forward I'm only buying CD's from Banks ... because if for some reason I need the funds before maturity I'll only lose interest - not principal ... with brokerage CD's you can lose principal. Just bought 1 yr 2.60% CD at Union Bank.

aristotelian
Posts: 6696
Joined: Wed Jan 11, 2017 8:05 pm

Re: Why buy a CD with a brokerage firm?

Post by aristotelian » Wed Apr 17, 2019 9:27 am

dm200 wrote:
Wed Apr 17, 2019 9:03 am
One advantage of brokered CDs is being able to have all of your CD investments FDIC insured and in one place (for convenience, etc.)
+1, especially if buying in tax advantaged account.

User avatar
dm200
Posts: 22959
Joined: Mon Feb 26, 2007 2:21 pm
Location: Washington DC area

Re: Why buy a CD with a brokerage firm?

Post by dm200 » Wed Apr 17, 2019 9:27 am

aristotelian wrote:
Wed Apr 17, 2019 9:27 am
dm200 wrote:
Wed Apr 17, 2019 9:03 am
One advantage of brokered CDs is being able to have all of your CD investments FDIC insured and in one place (for convenience, etc.)
+1, especially if buying in tax advantaged account.
Yes.

Dottie57
Posts: 7561
Joined: Thu May 19, 2016 5:43 pm
Location: Earth Northern Hemisphere

Re: Why buy a CD with a brokerage firm?

Post by Dottie57 » Wed Apr 17, 2019 10:16 am

Broken Man 1999 wrote:
Wed Apr 17, 2019 8:30 am
In no particular order...

- wider range of lengths of CDs available.
- amounts over $250,000 easy to accommodate to ensure FDIC protection is applicable.
- simplicity, no opening additional financial accounts as you try to find best rate every time you invest in a CD.
- ease of administering your portfolio as assets are in one location.
- buying and selling very simple, requires less time, thus ideal for lazy individuals (like myself).
- reinvesting funds from matured CDs very simple, and very quick.
- your financial/personal info isn't constantly being provided to new entities, thus reducing additional risks of security breaches.


Broken Man 1999
- wider range of lengths of CDs available.
- buying and selling very simple, requires less time, thus ideal for lazy individuals (like myself)

These reasons are key for me. I like setting up yearly cds for annual spending in retirement. Works well. Easier than going to the bank.

MotoTrojan
Posts: 7696
Joined: Wed Feb 01, 2017 8:39 pm

Re: Why buy a CD with a brokerage firm?

Post by MotoTrojan » Wed Apr 17, 2019 10:38 am

Fidelity let’s you build automated CD ladders which is pretty sweet. I’m using autorolled t-bills for my EF currently.

Alan S.
Posts: 8948
Joined: Mon May 16, 2011 6:07 pm
Location: Prescott, AZ

Re: Why buy a CD with a brokerage firm?

Post by Alan S. » Wed Apr 17, 2019 11:45 am

If your CDs are held in an IRA account, with a bank you would be justifiably concerned about efficient direct transfers, and avoiding a rogue 1099R exposing you to the one rollover limitation per 12 months. This seems to happen frequently with banks, but rarely with brokerage firms.

Banks have a tendency to want to cut you a check upon maturity if you do not renew. Since any individual bank's interest rates are not likely to be consistently competitive, if you use several banks as IRA custodians you will be transferring balances often, so there is more chance of the unwanted 1099R even when an actual non reportable transfer is done. The recent IRS change restricting rollovers to one for all your IRA accounts instead of one per account substantially increased this exposure. Failing the one rollover limit results in a taxable distribution plus penalty if under 59.5 and permanent loss of tax deferral. The IRS does NOT have the authority to make exceptions to this rule.

With brokerage CDs, you only have one account and little such exposure. Normally, you will not move that account, just change the banks issuing the CDs in that account just like you might change your other investments held in the same brokerage CD. Transfers from one broker to another rarely generate a rogue 1099R.

Makefile
Posts: 121
Joined: Fri Apr 22, 2016 11:03 pm

Re: Why buy a CD with a brokerage firm?

Post by Makefile » Wed Apr 17, 2019 11:47 am

If I want a portion of HSA in a CD it is drastically simpler to use a brokered CD + any other investments than to try and find a bank that offers a CD inside of an HSA.

Dandy
Posts: 6079
Joined: Sun Apr 25, 2010 7:42 pm

Re: Why buy a CD with a brokerage firm?

Post by Dandy » Wed Apr 17, 2019 12:10 pm

Pretty simple if you hold to maturity. If not you have to try to sell and can get a gain or loss. Interest goes to your clearing money market account and so does the CD amount at maturity. No need to move money from bank to bank or back to brokerage account. No worry about it rolling over to a new CD at the bank's then current rate.

User avatar
Earl Lemongrab
Posts: 7270
Joined: Tue Jun 10, 2014 1:14 am

Re: Why buy a CD with a brokerage firm?

Post by Earl Lemongrab » Wed Apr 17, 2019 5:49 pm

livesoft wrote:
Wed Apr 17, 2019 9:06 am
One might ask as well: Why buy a CD at all from anywhere?
I've not been interested in them in a long time. My 401(k) stable value generally meets or beats the long-term CD rates. Now, that rate isn't guaranteed for years, but it could go up as well as down.

Post Reply