Any Downsides to Brokered CDs?

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William Million
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Any Downsides to Brokered CDs?

Post by William Million »

I see many of them have higher rates than buying straight from banks.
sport
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Re: Any Downsides to Brokered CDs?

Post by sport »

I prefer them. There is no automatic renewal which may occur at low rates. When brokered CDs mature, the money just goes into your settlement fund. The one downside is that interest does not compound. Interest payments are made to your settlement fund and are not reinvested in the CD.
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HueyLD
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Re: Any Downsides to Brokered CDs?

Post by HueyLD »

William Million wrote: Wed Nov 24, 2021 11:13 pm I see many of them have higher rates than buying straight from banks.
FDIC insurance only covers the principal amount of the CD and any accrued interest. If a CD is purchased on the secondary market at a premium to principal value, the premium is ineligible for FDIC insurance
moneyflowin
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Re: Any Downsides to Brokered CDs?

Post by moneyflowin »

One downside is that they are not marginable so your marginable equity declines by the amount of the CD.

It's only an issue if you plan to buy stocks on margin, short sell stocks, or trade options, or make an emergency cash withdrawal. In those situations, you're better off with a marginable product like Treasuries or investment-grade bond funds
Northern Flicker
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Re: Any Downsides to Brokered CDs?

Post by Northern Flicker »

They are not very liquid. Plan to hold them to maturity. At 2-7 year terms, treasuries seem to offer a higher rate presently.
My postings are my opinion, and never should be construed as a recommendation to buy, sell, or hold any particular investment.
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quisp65
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Re: Any Downsides to Brokered CDs?

Post by quisp65 »

I hear selling the CD if you want to get out is not very kind on the investor. I have heard the advice that one should go into a brokered CD more with the mind of holding to maturity.

Check out EFCU's 5 year CD history... It has a 10 year history of paying good rates on CDs and it has a 180 day early withdrawal penalty.
https://www.depositaccounts.com/ira/5-y ... rates.html

https://www.depositaccounts.com/tools/e ... ids=281624

Maybe they are a PIA to deal with but I would of been happy with having those rates during the whole 10 year history.
Plan: stock index/roughly 5 years of expenses in fixed income, one-way balance market highs, slide withdrawal rate for comfort
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dodecahedron
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Re: Any Downsides to Brokered CDs?

Post by dodecahedron »

Big downside of Brokered CDs vs. buying direct is that buying CD directly from bank generally comes with a "put option." Brokered CDs have no such put option.

If interest rates rise, you can redeem a directly purchased CD early for a contractually fixed cost and reinvest the proceeds at higher rates.

(Though Nisiprius has repeatedly cautioned us that this put option on direct CD purchases is not 100% guaranteed. In theory, bank could decline your request for an early redemption but such declines, if they have happened, are exceedingly rate. This is sort of a safety valve mechanism that banks, in practice, have not wanted to use. Similar to the way that passbook savings accounts had a fine-print version that the bank could, technically, make you wait up to 30 days to process your withdrawal request.)

By contrast, with a brokered CD, there is NO provision whatsoever for early redemption with the issuer. If you want to cash it in early, your only option is to sell it on the secondary market. As noted above, it is a pretty illiquid asset.
sycamore
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Re: Any Downsides to Brokered CDs?

Post by sycamore »

Also, there's some info in the Boglehead wiki -- https://www.bogleheads.org/wiki/Certifi ... okered_CDs
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Svensk Anga
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Re: Any Downsides to Brokered CDs?

Post by Svensk Anga »

I've sold a couple brokered CDs. IIRC, I did not take much of a loss on the spread. (They had been in a traditional IRA, converted to Roth and then sold to move to equity.)

Brokered CDs pay interest twice a year into your settlement fund. Mark your calendar to get it reinvested. This is an advantage over direct CDs when rates are rising as you can re-invest at higher rates, but a disadvantage when they are moving the other way.
sport
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Re: Any Downsides to Brokered CDs?

Post by sport »

Svensk Anga wrote: Thu Nov 25, 2021 11:55 am Brokered CDs pay interest twice a year into your settlement fund.
While this is common, it is not always the case. I have one 2-year CD that pays interest at maturity. I have others that pay interest monthly.
Northern Flicker
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Re: Any Downsides to Brokered CDs?

Post by Northern Flicker »

If you are managing a ladder, brokered CDs generally are easier to work with because deposit institutions may only offer a competitive rate for certain maturities. At a given maturity use a treasury or CD whichever has a higher yield at time of purchase.
My postings are my opinion, and never should be construed as a recommendation to buy, sell, or hold any particular investment.
nalor511
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Re: Any Downsides to Brokered CDs?

Post by nalor511 »

In my experience they have worse rates than promotional rates from various credit unions (4% in 2018)
hudson
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Re: Any Downsides to Brokered CDs?

Post by hudson »

William Million wrote: Wed Nov 24, 2021 11:13 pm I see many of them have higher rates than buying straight from banks.
If I had money to invest in a taxable account, I would go with a brokered CD with a higher rate than from a credit union or bank. I wouldn't want all of my holdings in brokered CDs because I don't think that I'd want to try to panic sell a brokered CD.

If I was going to invest in an IRA and I had to make required minimum distributions (RMD), I would make sure that I could take the RMD from another holding.

What rates are you seeing?
NoblesvilleIN
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Re: Any Downsides to Brokered CDs?

Post by NoblesvilleIN »

This is all in our taxable account(s). I use 2-year CD's as my first line of defense should our other retirement income drop. A CD matures every 3 months (so we keep 8 CD's). We keep the CD's to maturity, so I have no experience with selling a brokered CD or cashing one in early at the credit union. I originally used brokered CD's at Fidelity, but a couple of years ago noticed that a local credit union had better rates. We now have moved all the CD money to that credit union.

A couple of differences:
The credit union posts the monthly interest back into the CD, where it compounds. The brokered CD posted the semi-annual or monthly interest to the settlement account, no compounding.
The credit union auto-rolls the CD at maturity (including the posted interest) unless you take action within a grace period (10 days, I think). The brokered CD posted the original amount to the settlement account at maturity. I think there is a feature at Fidelity that allows something that acts as an auto-roll where Fidelity will purchase a new CD at the prevailing best rate.

The current best rate at Fidelity for 2-year CD's is .55% while the 2-year rate at the credit union is 1.0%. The CD that matured this quarter was paying 3.04%, while the new replacement CD is paying 1.0%. Sigh
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Stinky
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Re: Any Downsides to Brokered CDs?

Post by Stinky »

NoblesvilleIN wrote: Fri Nov 26, 2021 10:13 am
The current best rate at Fidelity for 2-year CD's is .55% while the 2-year rate at the credit union is 1.0%. The CD that matured this quarter was paying 3.04%, while the new replacement CD is paying 1.0%. Sigh
Meanwhile, folks in most states can buy a 2 year multi year guaranteed annuity (MYGA) from an A- rated company that pays 1.80%. See this link. https://www.blueprintincome.com/fixed-a ... bourview-2

I know that MYGAs are not everyone’s cup of tea. But they are an alternative for yield-starved CD buyers.
Former life insurance company financial officer who sincerely believes that ”It’s a GREAT day to be alive!”
Northern Flicker
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Re: Any Downsides to Brokered CDs?

Post by Northern Flicker »

Treasury bonds, savings bonds, and TIPS are exempt from state and local income taxes. CDs are not.
My postings are my opinion, and never should be construed as a recommendation to buy, sell, or hold any particular investment.
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