Brokered Certificates of Deposit: More Risk than Reward?
Investors might be tempted to purchase brokered certificates of deposit (CDs) since they sometimes offer higher interest rates than traditional, bank-issued certificates of deposit. Traditional CDs are very low risk and offer modest interest rates, usually around 0.5%. In contrast, brokered CDs may offer higher interest rates thanks to the behind-the-scenes deals between the banks and brokerage firms. But buyers should beware: Brokered CDs can take decades to mature and might not be worth the wait.
Investors buy brokered CDs through a broker who works for an investment firm. The investment firm might be associated with the investor’s bank, in which case it may be easy for an investor to mistake a brokered CD for a regular, bank-issued certificate of deposit. But these CDs come with very different levels of risk.
If your broker did not tell you all the material facts and risks about your brokered CD or misled you to believe you had purchased a traditional CD, you should contact a securities attorney to help recover your money.
How Do Certificates of Deposit Work?
With both types of CDs –brokered CDs and bank-issued CDs – the issuer invests the deposit and attempts to earn a higher yield than the interest they offer the investor.
- All certificates of deposit have account minimums and come with fixed maturity dates.
- 0.75% is a high-interest rate for a bank CD. Most offer interest rates closer to 0.5%.
- If investors want to redeem their CDs before their maturity date, they must typically pay penalty fees.
- CDs might come with step-up or step-down features. Step-ups mean the interest rate increases after a certain number of years, while step-down CDs have interest rates that decline. These features allow investors to lock in a certain interest rate for a specified period. They do not necessarily have better yields than CDs with regular interest rates – in fact, the total interest may be less.
Why Do Investors Want Brokered CDs?
Brokered CDs consist of a certificate of deposit that a broker purchases for you. Brokers have access to CDs from multiple banks, meaning they can offer more options than what is available at your local bank. Brokerage firms can negotiate favorable CD prices with banks because of the volume of CDs they can purchase at one time.
Brokered CDs Vs. Bank CDs
Make sure you know the following characteristics of brokered CDs before you make a purchase:
Brokered CDs: Longer Maturity Dates
Bank-issued certificates deposits usually mature in three months to five years, whereas brokered CDs might not mature for 20 years.
Callable Brokered CDs
A brokered CD can be a callable CD, meaning that the issuer may redeem it if the interest rates drop, so they no longer have to pay the higher interest rate. At that point, the investor must decide if they want to start over with a new CD at a lower rate.
If you want a safer investment, make sure your brokered CD is non-callable.
New-Issue and Secondary Market Brokered CDs
Banks sell certificates of deposit that are issued by the bank itself. Brokerages can sell you brokered CDs that are either issued by a bank or sold on a secondary market.
Brokered CDs often come with fees that traditional CDs do not. Keep in mind that online banks offer certificates of deposit, and you may be better off finding a high-yield CD on your own – especially if your broker charges a transaction fee to purchase brokered CDs. Depending on the market, brokered CDs may not offer higher yields than regular certificates of deposit.
Frequently Asked Questions
Are Brokered CDs Securities?
Yes, brokered CDs are securities. Investors can buy and sell brokered CDs on a secondary market. This makes it possible to redeem them before their maturity dates, unlike regular bank CDs.
However, keep in mind that investors looking to sell their brokered CD may not find buyers quickly or be able to sell at the desired price.
Are Brokered CDs FDIC Insured?
Yes, brokered CDs almost always have FDIC insurance. They have FDIC insurance through the banks where the brokerage purchases their CDs. If your broker buys a CD through a non-FDIC insured bank, they should disclose this information as it adds substantial risk.
Fake Brokered CDs
Fake brokered CDs have also been at the center of outright scams. Nonetheless, if a registered broker sells a fake CD to an investor, the investor may still be able to sue to recover their losses through FINRA arbitration, even though these counterfeit financial products are not registered with FINRA. Purchasers may also pursue a criminal case against the fraudulent broker simultaneously.
The SEC warns investors to be alert to “spoofed” websites. These are some common red flags:
- Sites that only offer brokered CDs – real financial institutions typically also offer regular brokerage accounts or commercial banking services.
- High rates with no penalties for early withdrawals.
- High minimum deposits of $20,000 or more.
- Instructions to wire funds to accounts outside the U.S. or to accounts bearing different names than the financial institution that purports to sell the CDs.
Brokered CD Investment Fraud
Brokers may misrepresent the risks associated with brokered CD, especially if they are motivated by a broker fee. Investors should know how long their brokered CD will take to mature, and they should also be aware of the possible outcomes of a callable CD. Misrepresentation is a violation of securities law and is at the center of FINRA arbitration cases.
If you believe you lost money due to broker misconduct and misrepresentation, please contact the securities attorneys of Kurta Law today. You deserve a free case evaluation and information about what steps to take next. Call us at 877-600-0098 or use the contact form below.