Deciding whether to go with a certificate of deposit offered by a bank or a brokerage sounds like it might be a no-brainer. Just pick the one with the best rate, right?
Before choosing, though, you should know the risks and rewards of buying and holding either type of CD. There are some big differences that can ding returns.
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“Brokered CDs used to pay higher rates,” says Robert Laura, president of Synergos Financial Group in Howell, Michigan. Brokerages may still provide better rates, but not always.
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Brokered CDs do offer diversification among banks in different states. That makes it easier to ladder CDs, which is investing in several CDs with staggered maturities, says Herb Hopwood, president of Hopwood Financial Services in Great Falls, Virginia.
For investors parking more than $1 million, brokered CDs that can be diversified among many banks make sense because of the Federal Deposit Insurance Corp. insurance limit, which is $250,000 per depositor per insured bank. You’ll get more FDIC protection when you spread out your risk among different bank CDs nationwide.
Here’s another benefit of brokered CDs: Hopwood says when people buy lots of different CDs, they may forget when they’re scheduled to mature. Brokered CD purchases are usually listed on a brokerage statement, notifying you when maturity dates are approaching.
Given these wrinkles, the key to buying a CD is knowing what you’re buying. Here are some questions that can get you started:
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Take R-G Premier Bank of Puerto Rico, which failed in 2010. Its CDs were sold by brokers. “Brokers say, ‘Here’s the CD,'” Laura says. “But they may not lay out the bank’s financials.”
That means it’s up to you to identify and vet the issuer, not the broker. And if that bank fails, getting your money from a broker usually takes more time than getting it from a bank would.
“The process can take 60 to 90 days with a brokered CD,” Laura says. That’s time when your money isn’t being invested and earning interest. Conversely, bank depositors get their money faster, usually 7-10 days.
Also, a broker may unknowingly put your money into a CD at a bank where you already have deposits. Then, you may unknowingly wind up with a deposit that exceeds the $250,000 FDIC limit, warns the Securities and Exchange Commission.
On the flip side, local institutions that issue bank CDs are easier to vet and to follow. “But with a CD from a bank in Utah, you may not know it failed until it’s actually closed,” Laura says.
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