The next time you head for the bank to buy a certificate
of deposit, you may want to look at the options offered by a brokerage.
Many investors don't realize that brokerages sell
CDs. CDs aren't the most popular investment offered by brokerages,
and you may have to dig deep on the company's Web site to find its
Some brokerages came under fire from regulators for
allegedly misleading investors about callable
CDs. As a result, some investors may think all brokerage CDs
The fact is many brokerages sell a full line of noncallable
CDs at competitive rates for a wide variety of maturities.
Karen Liebsch of St. Louis-based Edward Jones says
her company averages about 75 to 80 CD offerings. Fidelity listed
about 20 during a recent visit to its Web site. The number of CDs
offered by your brokerage may be larger or smaller, but seeing them
all on one site or talking with one representative could save you
a lot of phone calls or Web surfing.
"We don't have CDs listed on our Web site,"
Liebsch says. "Customers would speak with their investment
representative, who has a full range of CDs. They range from three
months to 10 years. We don't sell callable CDs."
Jason Flurry, a certified financial planner and president
of Legacy Partners Financial Group, Woodstock, Ga., says there
are several benefits and several drawbacks to buying CDs from
brokerages. You'll have to decide if one side outweighs the
other when it comes to your investment needs.
Insured and centralized
One of the biggest benefits is you can buy CDs from several banks
without opening a new account at each bank. In addition to cutting
down on paperwork at tax time, Flurry says it can also be important
when it comes to FDIC coverage for your deposits.
"You could have $300,000 worth of CDs in your
one brokerage account, but because the money's in three different
banks every penny of it is FDIC insured," Flurry says.
To understand how your deposits are insured at a bank,
Another benefit of brokerage CDs, according to Flurry,
is that while the broker receives a commission for selling you a
CD, it doesn't come out of your pocket.
"The commission is negotiated between the brokerage
and the bank," says Flurry. "If you wanted a $50,000 CD,
you'd deposit $50,000 and earn interest on it, and you'd get all
of your money back at the end of the term."
Brokerages like to tout the liquidity of their CDs.
"With a bank you have an early
withdrawal penalty, with brokerages there is no penalty,"
says Mary Jane Brinkman, fixed income manager at Scottrade.
"You sell your CD on the secondary market and
receive either more, less or equal to what you originally paid for
it, depending on market conditions."
When it comes to interest rates, you'll have to do
some homework. Brokerage interest rates are competitive and often
higher than what you'll find locally, but you shouldn't expect to
squeeze a few extra basis points out of a broker the way you sometimes
can with a banker.
"Sometimes you can go to your bank and say the
bank across the street is offering 10 basis points more, and they'll
give it to you," says Flurry. "Rates at a brokerage aren't
negotiable. You don't get any special deals for being over 55, depositing
a large sum of money or doing a lot of business with a brokerage.
Rates are what they are. They don't care if you've got $10,000 or
Jack Ablin, chief investment officer at Harris Direct
says brokerage CDs are extremely competitive, but it pays for consumers
to comparison shop with banks in their neighborhood where they might
have a little more influence.
"Banks can be looking for a lot of different
things. They're looking for funding, but they're also looking for
relationships. They could encourage consumers by offering teaser
Banks have grown more creative with CDs. Many offer more than the
traditional fixed-rate CD. There are CDs that allow you to step
up to a higher interest rate during the term of the CD; others may
let you make a penalty-free withdrawal.
Brokerages offer options, too.
"There's a lot more to choose from than just
straight bullets (noncallable CDs)," says Brinkman. "There
are callables, zeros and secondaries. There are different maturities
and coupon (interest payment) frequencies where you can possibly
get higher yields."
A callable CD usually offers a higher rate of interest
because the issuer reserves the right to redeem the CD before maturity.
The CD would be redeemed early if interest rates fell because the
CD could be reissued at a lower rate. Most callable CDs come with
a one-year call protection period during which the CD can't be called,
and the interest rate is guaranteed. If the issuer doesn't call
the CD, the customer continues receiving the higher yield for the
remainder of the term.
If you buy a callable, make sure you understand the
difference between the call period and the maturity date. Also,
as with any CD, be sure the term (the length of time before the
CD matures) is appropriate for your budget.
A zero is a CD that doesn't have a coupon or interest
that's paid over the term of the CD. Instead, the CD sells at a
discount to face value, and when it matures you get the full face
value. You might buy a $10,000, five-year CD for $8,500. After five
years, you receive $10,000.
A drawback to zeros is that the IRS expects you to
pay tax on the interest as it accrues each year. Since it's phantom
interest, you'll have to come up with the cash unless the CD is
in a tax-deferred account.
Secondaries are CDs you buy from the secondary market.
Just as you could sell your brokerage CD by going to the secondary
market, you could also purchase one. If someone sold a five-year
CD after holding it for just three years, you could buy the CD,
hold it for the remaining two years and earn the five-year interest
The catch is you'd have to pay a premium for getting
that five-year interest rate on what amounts to a two-year CD. The
premium would be built into the principal. In other words, you might
pay $10,200 for a $10,000 CD. You'd have to rely on your broker
or get out your calculator to see if you would get a better yield
than what is currently offered on two-year CDs.
If stashing a CD certificate in your safe-deposit
box or under the mattress is important to you, a brokerage won't
be very accommodating. You'll get a confirmation of the purchase,
but everything is done electronically.