Brokered Certificates of Deposit Offer High CD Rates, With Some Strings Attached
September 02, 2009
Buying a Brokered Certificate of Deposit
Buying a brokered certificate of deposit is one possible way to get high CD rates. Basically, deposit brokers use the bargaining leverage they get by referring multiple clients to a bank to help them negotiate for better CD rates. However, that high CD rate does not come without some strings attached. Brokered CDs are far less straightforward than CDs you buy directly from a bank. Here are some things you need to know:
- Deposit brokers are not necessarily licensed. Don't let the expression "broker" fool you. Deposit brokers do not have to go through any state or federal licensing process. They may happen to be licensed securities brokers, but this is by no means a requirement. Therefore, you shouldn't assume that qualification or oversight standards are in place for regulating deposit brokers.
- You need to do some background checking. Since there is no formal licensing procedure in place, you'll have to do your own background check. If the deposit broker is a licensed securities broker, you should be able to check out any disciplinary history on through the Securities and Exchange Commission or the Financial Industry Regulatory Authority. If the broker is not licensed, try your state's consumer protection agency or doing a general Internet search on the broker's name and company.
- Identify the financial institution issuing the CD. A broker acts as a go-between, so ultimately there is an unaffiliated financial institution that actually issues the certificate of deposit. You'll want to know the identity of that institution for a couple of reasons. First, you'll want to make sure they are an FDIC-insured bank. Second, you'll want to know in case you have other deposits with that bank -- the $250,000 deposit insurance level is applied per depositor at each financial institution, so having an amount in excess of that limit at one bank would leave a portion of your deposit uninsured, even if it happens to be split into two CDs or accounts.
- Understand whether you are a sole or a joint owner of a CD. One technique a deposit broker may employ to get a high CD rate is to pool several depositors into one CD. This can bring the total deposit to a level that might qualify for special high CD rates, but it also means you are relying on the deposit broker's book keeping to make sure your fair share of principal and interest is credited to you. Participating in an unregulated pool is extremely risky, so you will want to know everything you can about the book keeping process.
- Find out what the penalties for early withdrawal are. Another complication that comes with participating in pooled ownership of a CD is that it can make the cost of early withdrawal more onerous. Normally, if you bought into a CD directly through a bank, you would stand to lose some portion of your interest if you withdrew too early, and after a sufficient amount of time went by you might face no penalty at all. In a pooled CD, the deposit broker would have to find another depositor who was willing to buy your portion of the CD if you wanted to get out early. The market for this is extremely limited, so you would be selling at a disadvantage.
Source: SEC • http://www.sec.gov/investor/pubs/certific.htm