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Brokered CDs come with some risks

By Claes Bell, CFA · Bankrate.com
Monday, August 13, 2012
Posted: 5 pm ET

In these days of record-low CD rates, CD investors are looking for higher yield wherever they can get it. One popular way to do that is to have a broker go out into the marketplace and find a bank willing to offer a higher yield than what's available to you locally.

Brokered CDs, as they're called, also simplify the task of protecting more than the FDIC insurance limit of $250,000 by making it easier to track multiple CDs -- even a whole ladder -- from a single brokerage statement.

But on its website, the FDIC has some words of caution on brokered CDs.

Be aware, however, that CDs sold by brokers sometimes can be complex and carry more risks than traditional CDs sold directly by banks. An incompetent or unscrupulous broker could mislead or defraud its customers, resulting in loss or theft of the consumers’ funds. Since FDIC insurance coverage only applies if the broker in fact properly establishes and maintains the CD account on your behalf with your funds, it is very important to verify that you are dealing with a reputable broker when purchasing a CD. If the broker mishandles or misappropriates your deposit, your only recourse is against the broker.

While a bad CD will be just one of many issues you'll have if it turns out your broker is crooked, the FDIC does have some words on due diligence for brokered CD buyers:

  • Look up the bank in the FDIC's Bank Find service online, or call them at (877) 275-3342, to verify the bank is FDIC-insured.
  • Just because a bank sells it doesn't make it a CD. Be sure that what you're buying is a "deposit," which is insured, and not an "investment," which is not.
  • Read the fine print to be sure you understand all the fees, early withdrawal penalties and other characteristics before pulling the trigger.

I'd also add that if you're looking for information on a particular bank you're thinking of getting a brokered CD from, Bankrate's Safe & Sound was recently updated and has a wealth of information on FDIC-insured banks' financial conditions and size.

Follow me on Twitter: @ClaesBell.

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