I’ve had online brokerage accounts at Fidelity and Vanguard for about three months now, and I’m still learning the ropes.
I’m getting a hands-on education in fixed-income investing, including buying and selling brokered CDs.
For the uninitiated, a brokered CD is a bank certificate of deposit sold to the public through a financial intermediary.
According to their disclosure statements, CDs sold by Fidelity and Vanguard are represented by “master certificates” held at the Depository Trust Co. Beneficial ownership of individual pieces by customers is indicated on the brokers’ records.
In some respects, a brokered CD is no different than a CD issued directly to a depositor at a bank branch or online.
It’s a bank’s promise to repay a specified amount on a specified maturity date and to pay interest on that amount during the CD’s term.
It’s also insured by the Federal Deposit Insurance Corp. under the same general rules that apply to other deposit accounts — up to $250,000 per depositor per bank.
Unlike most CDs issued directly, however, most brokered CDs don’t provide early-withdrawal rights, except on the owner’s death or legal incompetence.
They’re transferable, however, and can be sold in the open market.
I used to associate brokered CDs with small, financially weak institutions, unable to attract long-term deposits any other way.
But now I know better.
Online brokers offer CDs of big money-center banks (such as Citibank and Bank of America); prominent online banks (including Ally and Discover); and brand-name banks selling CDs to the general public only through brokers (GE Capital Retail Bank and Goldman Sachs Bank USA), as well as CDs of smaller, lesser-known banks.
Brokered CDs include new issues (those sold by the bank itself through the broker) and secondary market CDs (previously issued CDs sold by investors).
New-issue CDs are normally sold without commission charges to the buyer. The bank pays the broker a placement fee, usually producing a lower yield to the buyer.
Secondary market purchases generally involve a commission payment by the buyer and may also reflect a spread between what the broker (or an affiliate) pays for the CD and what the investor pays to buy it.
All that said, brokered CDs continue to baffle me.
I sometimes stumble over things like their low yields, the fine points of FDIC insurance and their fitness for my Individual Retirement Account (IRA).
I’ll address these matters in future posts.