Brokered CDs - how to pick

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jj45
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Brokered CDs - how to pick

Post by jj45 » Fri May 10, 2019 7:58 am

I'm helping an elderly relative buy some brokered CDs through Fidelity. They are extremely risk averse and they don't have an immediate need for the funds. I think I understand that buying individual FDIC insured CDs in amounts below the FDIC limit from different banks gives all the CDs FDIC insurance.

How do you pick which CD to buy? Do you all just pick the CD with the highest interest rate? Do you pay attention to the specific bank and do some research on the likelihood that bank will fail? Are there other considerations? Thanks.

Rudedog
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Re: Brokered CDs - how to pick

Post by Rudedog » Fri May 10, 2019 8:15 am

Consider highest rate, early withdrawal penalty, status of the bank, you can do research on bankrate.com.

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Dialectical Investor
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Re: Brokered CDs - how to pick

Post by Dialectical Investor » Fri May 10, 2019 8:17 am

This may not be the best idea, buying a product you're not too familiar with for an elderly relative. Would a money market mutual fund, high-yield savings account, short-term bond fund, or direct bank CD not suffice for this person?

A few of the things to be aware of:

Premiums are not FDIC insured. You pay a premium if you pay more than par (100). One CD is $1,000 at par, before transaction fees and accrued interest due to the seller, if any.

Brokered CDs are less liquid than, say, a bond fund. The spread--the difference between the buy and sell prices--may be 1%-2% of the CD value, on the high side for smaller quantities and the low side for larger quantities. I would only buy what I was confident could be held to maturity and not sold early.

Some brokered CDs are callable. I would avoid them.

The value of the CD will fluctuate like a bond. If you have to sell early, in addition to the spread and any transaction costs, the CD may have declined in value. This is in contrast to more well-defined penalties for breaking bank CDs early. (There is no early withdrawal penalty for brokered CDs.)

You will have to do something with the interest payments or let them sit in the cash account.

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Sandtrap
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Re: Brokered CDs - how to pick

Post by Sandtrap » Fri May 10, 2019 8:34 am

If CD's, consider "new issue" from a brokerage. IE: Vanguard, Schwab, Fidelity, etc.
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dm200
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Re: Brokered CDs - how to pick

Post by dm200 » Fri May 10, 2019 8:37 am

I would pick the highest rate.

I would, also, either pick new issues or purchase on the secondary market with no premium.

All else being equal, pick CD from different bank.

not4me
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Re: Brokered CDs - how to pick

Post by not4me » Fri May 10, 2019 8:59 am

If a brokered CD qualifies for FDIC (& I think there are some that don't?), I wouldn't be concerned about the institution itself.

Other considerations? Depends on some of the other aspects of the relatives situation. What term of CD to buy? Make sense to ladder? If this is in taxable, would they be as happy with a Treasury & better off tax wise? What about any concern about affect on estate planning -- that is, if they should die, is it important that the beneficiary be able to "redeem"/sell?

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stockpickerted
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Re: Brokered CDs - how to pick

Post by stockpickerted » Fri May 10, 2019 9:06 am

I buy brokered CDs from TD and usually stick to 1-2 month durations. Currently can get 2.3% for 1 month, not too bad for FDIC safety.

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Wiggums
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Re: Brokered CDs - how to pick

Post by Wiggums » Fri May 10, 2019 9:25 am

All good advice here.

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jj45
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Re: Brokered CDs - how to pick

Post by jj45 » Fri May 10, 2019 9:37 am

Dialectical Investor wrote:
Fri May 10, 2019 8:17 am
This may not be the best idea, buying a product you're not too familiar with for an elderly relative. Would a money market mutual fund, high-yield savings account, short-term bond fund, or direct bank CD not suffice for this person?

A few of the things to be aware of:

Premiums are not FDIC insured. You pay a premium if you pay more than par (100). One CD is $1,000 at par, before transaction fees and accrued interest due to the seller, if any.

Brokered CDs are less liquid than, say, a bond fund. The spread--the difference between the buy and sell prices--may be 1%-2% of the CD value, on the high side for smaller quantities and the low side for larger quantities. I would only buy what I was confident could be held to maturity and not sold early.

Some brokered CDs are callable. I would avoid them.

The value of the CD will fluctuate like a bond. If you have to sell early, in addition to the spread and any transaction costs, the CD may have declined in value. This is in contrast to more well-defined penalties for breaking bank CDs early. (There is no early withdrawal penalty for brokered CDs.)

You will have to do something with the interest payments or let them sit in the cash account.
Thanks for this. I would say I'm moderately familiar with CDs and have bought them for myself before. I understand the issues you raise and thank you for reinforcing these points. FDIC insurance is important so money market and bond funds are out. The total amount is more than the FDIC limit so high-yield savings accounts and direct bank CDs would require multiple institutions and that won't fly with this person so those are out as well.

ladycat
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Re: Brokered CDs - how to pick

Post by ladycat » Fri May 10, 2019 10:16 am

  • I always purchase new issues that are not callable.
  • I double check the start & maturity dates. They'll group the 11, 12, 13, 14 month cd-s in the "1 year" category, then if you just look at the highest rate, you may have selected a 14 month CD thinking it's a 1-year CD.
  • I make sure I'm using that bank where the total of all the CDs I have doesn't exceed the FDIC insurance limit.

MotoTrojan
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Re: Brokered CDs - how to pick

Post by MotoTrojan » Fri May 10, 2019 10:26 am

stockpickerted wrote:
Fri May 10, 2019 9:06 am
I buy brokered CDs from TD and usually stick to 1-2 month durations. Currently can get 2.3% for 1 month, not too bad for FDIC safety.
Last I checked t-bills were around 2.4% and state tax-free.

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alpenglow
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Re: Brokered CDs - how to pick

Post by alpenglow » Fri May 10, 2019 10:49 am

MotoTrojan wrote:
Fri May 10, 2019 10:26 am
stockpickerted wrote:
Fri May 10, 2019 9:06 am
I buy brokered CDs from TD and usually stick to 1-2 month durations. Currently can get 2.3% for 1 month, not too bad for FDIC safety.
Last I checked t-bills were around 2.4% and state tax-free.
I came to say this. Rates on brokered CD's aren't so hot right now. With the flattened yield curve, I'd be rolling t-bills. I think you can setup an auto-roll with Fidelity.

MotoTrojan
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Re: Brokered CDs - how to pick

Post by MotoTrojan » Fri May 10, 2019 11:54 am

alpenglow wrote:
Fri May 10, 2019 10:49 am
MotoTrojan wrote:
Fri May 10, 2019 10:26 am
stockpickerted wrote:
Fri May 10, 2019 9:06 am
I buy brokered CDs from TD and usually stick to 1-2 month durations. Currently can get 2.3% for 1 month, not too bad for FDIC safety.
Last I checked t-bills were around 2.4% and state tax-free.
I came to say this. Rates on brokered CD's aren't so hot right now. With the flattened yield curve, I'd be rolling t-bills. I think you can setup an auto-roll with Fidelity.
You sure can. Super easy.

Dottie57
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Re: Brokered CDs - how to pick

Post by Dottie57 » Fri May 10, 2019 1:26 pm

Sandtrap wrote:
Fri May 10, 2019 8:34 am
If CD's, consider "new issue" from a brokerage. IE: Vanguard, Schwab, Fidelity, etc.
This. You can get lots of different durations.

Note: I don’t think there is compounding on Brokered CDs. You get simple interest. I keep all cds at 1 year duration or less.

You can’t “break” a CD to get money back, but have to sell it.

Good luck!

FireAway
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Re: Brokered CDs - how to pick

Post by FireAway » Fri May 10, 2019 2:46 pm

What's the advantage of a brokered CD, as compared to buying from a bank? I've never seen any pros, other than specific durations - say, if I have some money from a stock sale and know I'll need it in 4.5 months, I'll find a brokered CD with that duration.

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jj45
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Re: Brokered CDs - how to pick

Post by jj45 » Fri May 10, 2019 4:11 pm

FireAway wrote:
Fri May 10, 2019 2:46 pm
What's the advantage of a brokered CD, as compared to buying from a bank? I've never seen any pros, other than specific durations - say, if I have some money from a stock sale and know I'll need it in 4.5 months, I'll find a brokered CD with that duration.
For me, the advantage is simplicity, everything is done through their one brokerage which they are comfortable with. The person I'm working with is not interested in shopping many different banks. Since they are looking for short duration CDs, the shopping burden is magnified.

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Re: Brokered CDs - how to pick

Post by jebmke » Fri May 10, 2019 5:06 pm

FireAway wrote:
Fri May 10, 2019 2:46 pm
What's the advantage of a brokered CD, as compared to buying from a bank? I've never seen any pros, other than specific durations - say, if I have some money from a stock sale and know I'll need it in 4.5 months, I'll find a brokered CD with that duration.
Volume. If you want to put a few million into CDs it would be cumbersome to do it by going to individual banks.
When you discover that you are riding a dead horse, the best strategy is to dismount.

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Dialectical Investor
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Re: Brokered CDs - how to pick

Post by Dialectical Investor » Fri May 10, 2019 9:08 pm

FireAway wrote:
Fri May 10, 2019 2:46 pm
What's the advantage of a brokered CD, as compared to buying from a bank? I've never seen any pros, other than specific durations - say, if I have some money from a stock sale and know I'll need it in 4.5 months, I'll find a brokered CD with that duration.
A few years back, when yields were extremely low, you frequently could get a better deal on a brokered CD than you could on a direct bank CD, even among the major players that offer(ed) relatively good rates. Not the absolute best rate, mind you, but not much less, and you didn't have to open an account with an unfamiliar institution or jump through hoops to take advantage of some limited time offer. You also could get a longer term than most direct bank CDs--finding terms out to 10 years was no problem. Taking on more term risk to get better yields was a strategy for some, especially for those tired of hearing about rates "going up soon," only to find they went nowhere. After a while, fatigue set in, and some investors figured rates would stay down for a long time, so they might as well extend maturity well beyond what typically was offered for direct bank CDs. The yields were often much better than Treasury notes too. Things have changed somewhat, with higher yields across the board, even though they still aren't great, a much flatter yield curve, and smaller spreads between Treasury notes and CDs. The above is merely my own narrative from observation and anecdote--not hard data.

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Re: Brokered CDs - how to pick

Post by LadyGeek » Fri May 10, 2019 9:24 pm

The wiki has some background info: Brokered CDs
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Re: Brokered CDs - how to pick

Post by venkman » Fri May 10, 2019 9:42 pm

jj45 wrote:
Fri May 10, 2019 7:58 am
How do you pick which CD to buy? Do you all just pick the CD with the highest interest rate? Do you pay attention to the specific bank and do some research on the likelihood that bank will fail? Are there other considerations? Thanks.
Some people have a preference about frequency of payment. I think most brokered CD's pay out semiannually, but there are some that pay out monthly.

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Re: Brokered CDs - how to pick

Post by sport » Fri May 10, 2019 10:19 pm

FireAway wrote:
Fri May 10, 2019 2:46 pm
What's the advantage of a brokered CD, as compared to buying from a bank? I've never seen any pros, other than specific durations - say, if I have some money from a stock sale and know I'll need it in 4.5 months, I'll find a brokered CD with that duration.
Some banks have good interest rates only on "special CDs". Then, these CDs automatically renew at "standard rates" when they mature. If you don't want them to renew, or don't like the rates, you have a limited time to make other arrangements, perhaps about one week. So, if you are not paying close attention, you can end up where you do not want to be. Conversely, when a brokered CD matures, it dumps all the money with the last interest payment into your settlement fund. You can then make whatever new investments you wish, whenever you wish.

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dm200
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Re: Brokered CDs - how to pick

Post by dm200 » Mon May 13, 2019 8:24 am

venkman wrote:
Fri May 10, 2019 9:42 pm
jj45 wrote:
Fri May 10, 2019 7:58 am
How do you pick which CD to buy? Do you all just pick the CD with the highest interest rate? Do you pay attention to the specific bank and do some research on the likelihood that bank will fail? Are there other considerations? Thanks.
Some people have a preference about frequency of payment. I think most brokered CD's pay out semiannually, but there are some that pay out monthly.
Brokered CDs may pay monthly, quarterly, semi-annually, annually or at maturity (if not more than one year CD).

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