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Brokered CD's
Old 07-11-2008, 01:13 AM   #1
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Brokered CD's

I have always bought CD's from local banks by just walking in a buying them.

But after setting up accounts with Fidelity and Vanguard I noticed that there is a LOT of CD's available to purchase both new and secondary.

Supposedly one of the advantages of buying a CD through a brokerage is that you can sell it through the brokerage if you needed the money. It doesn't seem that you would loose a whole lot if you were forced to do that judging by the secondary CD prices.

I was thinking of buying a few CD's through through Vanguard or Fidelity and I wanted to see if anyone had and bad experiences buying them that way vs. just going to a local bank?


Thanks

Jim
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Old 07-11-2008, 06:26 AM   #2
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We've bought brokered CDs in our TDAmeritrade IRA accounts without any problems. If the rates are better than locally, it's a good way to go. Also it's a good way to go to cash in an IRA without having to change the place where you hold your IRA.
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Old 07-11-2008, 06:52 AM   #3
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I've bought them at Schwab and they are fine. Make sure you stay under the FDIC cap.
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Old 07-11-2008, 07:07 AM   #4
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A much more convenient way of buying them. My parents had them strung out all over town. I had them combined through a brokerage account and handle it over the phone or on computer. No problems.
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Old 07-11-2008, 09:38 AM   #5
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I've bought them at Schwab and they are fine. Make sure you stay under the FDIC cap.
I have never bought CD's through a broker, but I had the impression that the FDIC insurance on such CD's is proportional; that is:

The brokerage buys a $1M CD from a financial institution that is FDIC insured and then offers pieces of it to its clients. You buy a piece of that insured CD, lets say $95K (to allow interest to accumulate without exceeding what you think is the $100K FDIC insurance limit). Then the financial institution that issued the CD goes belly-up. FDIC pays off the $100K maximum insurance coverage on the original CD. You get a proportional share of the insurance: < $10K.

I was told by a financial planner that this is how it works. Anybody know if this is correct? If so, I will continue to steer clear of such CD's.

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Old 07-11-2008, 09:40 AM   #6
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I have never bought CD's through a broker, but I had the impression that the FDIC insurance on such CD's is proportional; that is:

The brokerage buys a $1M CD from a financial institution that is FDIC insured and then offers pieces of it to its clients. You buy a piece of that insured CD, lets say $95K (to allow interest to accumulate without exceeding what you think is the $100K FDIC insurance limit). Then the financial institution that issued the CD goes belly-up. FDIC pays off the $100K maximum insurance coverage on the original CD. You get a proportional share of the insurance: < $10K.

I was told by a financial planner that this is how it works. Anybody know if this is correct? If so, I will continue to steer clear of such CD's.

Grumpy

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That's not my understanding at all. As I understand it, each individual depositor is considered a separate account for FDIC insurance, so if you buy 95k or less from an institution you are fully covered. A call to your broker should clear this up.
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Old 07-11-2008, 09:47 AM   #7
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Quote:
Originally Posted by grumpy View Post
I have never bought CD's through a broker, but I had the impression that the FDIC insurance on such CD's is proportional; that is:

The brokerage buys a $1M CD from a financial institution that is FDIC insured and then offers pieces of it to its clients. You buy a piece of that insured CD, lets say $95K (to allow interest to accumulate without exceeding what you think is the $100K FDIC insurance limit). Then the financial institution that issued the CD goes belly-up. FDIC pays off the $100K maximum insurance coverage on the original CD. You get a proportional share of the insurance: < $10K.

I was told by a financial planner that this is how it works. Anybody know if this is correct? If so, I will continue to steer clear of such CD's.

Grumpy

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That's NOT how it works. FDIC covers UP TO $100,000 PER account. If the institution goes belly-up, they go into receivorship, where other banks can take over their CDs and put the FDIC umbrella over them. If noone wants the bank, it is dissolved, and FDIC comes in and makes the depositors affected whole up to $100,000 per account.
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Old 07-11-2008, 09:57 AM   #8
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Quote:
Originally Posted by grumpy View Post
I have never bought CD's through a broker, but I had the impression that the FDIC insurance on such CD's is proportional; that is:

The brokerage buys a $1M CD from a financial institution that is FDIC insured and then offers pieces of it to its clients. You buy a piece of that insured CD, lets say $95K (to allow interest to accumulate without exceeding what you think is the $100K FDIC insurance limit). Then the financial institution that issued the CD goes belly-up. FDIC pays off the $100K maximum insurance coverage on the original CD. You get a proportional share of the insurance: < $10K.

I was told by a financial planner that this is how it works. Anybody know if this is correct? If so, I will continue to steer clear of such CD's.

Grumpy

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Again, this is not ture. The 100k limit is per client accont. We buy several million worth of CDs a week through Schwab for clients. We had several people holding ANB financial which went belly up recently and all were paid back very quickly.

Last week they had a ton of 5.0% 3 and 4 years. We backed up the truck on those.
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Old 07-12-2008, 10:49 AM   #9
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Again, this is not ture. The 100k limit is per client accont. We buy several million worth of CDs a week through Schwab for clients. We had several people holding ANB financial which went belly up recently and all were paid back very quickly.

Last week they had a ton of 5.0% 3 and 4 years. We backed up the truck on those.
So these are callable CDs meaning after one year, the institution offering them could return your proceeds plus interest up to that time?

Otherwise, you have to keep the funds for 3 or 4 years?
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Old 07-12-2008, 01:05 PM   #10
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Just an FYI, you can break local bank CD's quite easily and normally you only forfeit something like 3 months interest {each CD sets this penalty forth in the "contract" and they differ some}. Thus, CD's are not the "oh crap, I'm locked in for three years" asset that many believe.

PS - I've never owned a CD but I worked in the financial world wherein we bought CD's for clients occasionally when local yields would be better than treasury yields.
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Old 07-12-2008, 05:34 PM   #11
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Supposedly one of the advantages of buying a CD through a brokerage is that you can sell it through the brokerage if you needed the money. It doesn't seem that you would loose a whole lot if you were forced to do that judging by the secondary CD prices.

I asked my Fidelity rep about this feature. He said in all the years he has worked there, he doesn't know of any being sold. He advised buying the maturity I wanted, and planning to hold. Not that it couldn't be sold; but he made it sound unwieldy and possibly expensive.

Ha
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Old 07-13-2008, 09:33 AM   #12
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HaHa

Go to Fidelity's website and look at secondary CD's ....there is usually a bunch of them. I take it that these are all CD's owned by people that needed their money back so they sold their CD on the open market.

Huskerblue

I found the CD rates are better through the brokerages. But I know what you mean on the penalty that you pay if you need your cash early. I called several local banks and asked about this. The biggest surprise for me was that there is a lot of difference bank to bank as to how much the penalty was. For a CD of 5 years for instance it was 6 months interest and another bank it was like 2 years so I guess it's good to know that before you put your money down!

Jim
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Old 07-15-2008, 12:38 PM   #13
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Anyone ever use CDARS?

Seems to be mostly small regional banks and the rates they offer are not said to be as competitive.
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Old 07-15-2008, 01:05 PM   #14
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I asked my Fidelity rep about this feature. He said in all the years he has worked there, he doesn't know of any being sold. He advised buying the maturity I wanted, and planning to hold. Not that it couldn't be sold; but he made it sound unwieldy and possibly expensive.

Ha
There are a bunch up for sale on the secondary market at Schwab. As you might imagine these are smaller investors so the amount up for sales is usually in the range of $1K to 10K per CD. They usually sell at a discount of .5 to 2% of face. If you had the patience to sort through them you could bump the yield on your CD ladder by making some low bids.
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