A Short Guide to Understanding Brokered CDs
When investing, it’s not all about taking stock market risk. Fixed income, like CD’s, offers more principal stability and regular income from interest payments.
Most people don’t know that CD’s are available through investment companies (like ours) often with better rates and terms than banks can offer. Here’s what you should know:
Potential Advantages of Brokered CDs
Potentially Higher Yields: Access to a nationwide market can uncover better rates.
Wider Selection: Choose from various banks, terms, and rates in one place.
Secondary Market Liquidity: Offers a way to potentially exit the CD early (though subject to market prices).
Consolidated Reporting: CDs appear on your regular brokerage statement.
FDIC/NCUA Insurance: Offers the same deposit insurance security (verify the issuing bank).
What is a brokered cd?
Bank CDs: Purchased directly from a bank or credit union.
Brokered CDs: Purchased through a brokerage account. Held in your portfolio.
Think of the brokerage as a marketplace. They work with numerous banks to offer their CDs to investment clients. The underlying CD is still a deposit obligation of the issuing bank, not the brokerage firm.
Yes, they’re still FDIC Insured
The same deposit insurance applies: $250,000 per depositor/account holder, per insured issuing bank.
Liquidity
Instead of facing bank penalties for early withdrawal, you can often sell a brokered CD on the secondary market via your broker before it matures. You’ll even collect accrued interest from the time you held.
Most Bank CD’s make you forfeit the interest if you need your principal back.
Risks to Brokered CD’s
Crucially, the price fluctuates if sold before maturity. If interest rates have risen since your purchase, you may receive less than your initial investment (interest rate risk). If rates have fallen, you might gain. Again, this is not an issue if held to maturity.
Some (not all) brokered CDs are also "callable" – the issuing bank can redeem them early (usually if rates drop), returning your principal and accrued interest but ending future payments at that higher rate. You’ll know if it’s callable
Brokered CD’s might be a good fit for investors who:
Are comfortable using a brokerage account.
Are seeking potentially higher yields than offered locally.
Want to diversify their CD holdings across multiple banks easily.
Understand the risks associated with the secondary market and potential call features.
If you’d like to discuss current rates or consider investing, give us a call at 530-487-1777 or schedule an appointment online HERE
Disclosures: Please be aware that the information provided on this blog regarding Certificates of Deposit (CDs) is intended for general knowledge and informational purposes only. It should not be considered financial advice, a recommendation to buy or sell any specific financial product, or a substitute for personalized advice from a qualified financial advisor.
The author of this blog may have a general understanding of financial topics related to CDs but is not acting as a financial advisor or fiduciary in this context. The information presented here may not be suitable for your individual financial situation, risk tolerance, or investment goals.
Key points to consider:
Interest rates and terms can vary. The specific interest rates, annual percentage yields (APYs), terms, and conditions of CDs can differ significantly between financial institutions and may change over time based on market conditions. Always verify the current rates and terms with the specific financial institution before making any investment decisions.
CDs have risks and limitations. While generally considered low-risk, CDs are subject to risks such as inflation risk (where the purchasing power of your returns may be eroded by rising prices) and interest rate risk (the risk of locking in a rate that becomes less favorable if interest rates rise). Additionally, early withdrawal penalties may apply if you access your funds before the CD's maturity date, potentially reducing your principal.
FDIC Insurance: Certificates of Deposit held at FDIC-insured banks are typically insured up to $250,000 per depositor, per insured bank, for each account ownership category. However, it is your responsibility to understand the terms and limits of this insurance and how it applies to your specific situation.
Brokered CDs: If the blog discusses brokered CDs, it's important to note that these may have different features, liquidity constraints, and risks compared to direct CDs offered by banks.
Tax implications: The interest earned on CDs is generally taxable. Consult with a tax advisor for information relevant to your specific tax situation.
Before making any decisions about investing in CDs, it is crucial to conduct your own thorough research and consider consulting with a qualified financial advisor who can provide advice tailored to your individual circumstances. The author and publisher of this blog are not responsible for any financial losses or decisions made based on the information provided herein.