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Am I overpaying for my brokered CD?

July 23, 2012

By Richard Barrington | MoneyRates.com Senior Financial Analyst, CFA

FDIC insurance

Q: I have $10,000 in a brokered CD, which lets me get a little better interest rate -- 1 percent on a two-year CD. The downside is that the brokerage firm charges me $40 a year to keep a brokerage account with them. That seems steep to me. Do you think I'm overpaying?

A: The short answer is yes, you are overpaying. Your brokerage fee is effectively negating most of the extra interest you are earning.

The average rate on a two-year CD is 0.46 percent, according to FDIC figures from mid-2012. That would earn you $46 a year on $10,000. Instead, you are earning $100, which is 1 percent of $10,000. However, you are paying $40 back, so you are only netting $60 a year. That's a little better than you'd get at the average rate, but not much better. It's as if you were earning 0.60 percent interest, and you could probably do better than that getting a CD directly from a bank if you shop for the best CD rates.

Brokered CDs can make sense if the broker is able to negotiate a better rate from banks by coming to them with deposits from several customers. However, in your case that better rate is largely negated by the account fee. Note that this might be different if you had a larger deposit, since interest is earned as a percentage of your account, whereas the fee is a fixed-dollar figure. In other words, while that $40 fee is 0.40 percent of $10,000, it would only be 0.04 percent of $100,000.

Brokered CDs can also make sense for customers with very large amounts of money to deposit, as a way of maximizing FDIC insurance. For example, if you had a million dollars to deposit, a broker could spread that among multiple banks so that you would not exceed the $250,000 insurance limit at any one bank. Having a broker do this for you would save you the trouble of finding those banks yourself. However, your current deposit amount is comfortably under the $250,000 limit, so this wouldn't be a benefit to you.

Sometimes brokered CDs can also provide additional liquidity. The broker might be able to help you avoid a penalty if you needed to withdraw your money early, but this depends on the ability of the broker to find another customer willing to to take on your CD at that time.

Finally, one crucial thing with brokered CDs is to make sure the CD is established with an FDIC-insured bank in your name. Otherwise, you are probably not protected by FDIC insurance.

Got a financial question about saving, investing, or banking? MoneyRates.com invites you to submit your questions to its "Ask the Expert" feature. Just go to the MoneyRates.com home page and look for the "Ask the Expert" box on the lower left.

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