Who Knew? Schwab 3rd party CD's

[dunkelblau]

dunkelblau - you are looking for the catch, when there is none. Those megabanks you point to are looking to rip off folks who do not know any better.

https://www.bankrate.com/cd.aspx

Use the Term dropdown to see what the rates are for different maturities.

OK I surrender, I bought several of these at the open today. Thanks I did find the other famous name banks on Schwab's list so I spread it out.

Another distinction between these CDs and what you buy directly from a bank is that bank CD deposits can be withdrawn at any time with a small early withdrawal penalty while these brokered CDs have to be held to maturity by someone (to cash out you have to sell-- or croak). So the bank CD has a built-in 'put' option that maybe is charged against the APR? IOW brokered CD = bond and bank CD = bond+put, which could be a big deal if there's an abrupt large rise in interest rates, so no 'free lunch' here, right?

 

[audreyh1]

njhowie, thanks, from their websites I see 12-month CDs yield 0.25% at Citi, 0.07% at BofA, and a whopping 0.02% at Chase (0.05% for 100K+), so the 0.15% at Wells isn't "abnormally low" in comparison.

But that Wells 2.1% 13-month on Schwab was at the top of the 12-mon list when I checked, and I didn't notice anything from the other megabanks. Most of the offerings in the 1.5-2% range are from banks I've never heard of, so in the overall distribution I'd call these outliers. I'd guess the median 1-year CD rate is ~0.5% around where I live.

Maybe it's best to just take the gift horse without understanding it. I was lucky to sidestep the ARS and YieldPlus debacles from many years ago; I never bought into those because I hadn't heard of them until afer they made the news. What worries me now is that the 'free lunch' part (i.e. reward >> risk) sounds familiar.

What you are missing is the large group of online banks that are offering 12 month CD rates in the 2% range. That brings the brokerage offerings in line.

“Where you live” doesn't matter anymore for CD rates and hasn’t for a long time now.

Or maybe I'll go with the notion that the bank website offerings are "old inventory" while the brokered CDs are the latest and greatest-- so it's all reasonable. And savers who have neither internet nor a brokerage account are hosed.

No. Nothing like that about it. They clearly choose to hide their best rates from their direct customers. Selling through brokerages instead must much cheaper.

 

[Another Reader]

My guess is the brokers are getting a couple of basis points off the top to broker these. Still looks good to the consumer, because of the rates. The big banks can sucker the unwary person at the retail branches, but have to compete on a platform where yields are compared. Of course, they are placing millions of dollars with these as opposed to a few thousand each to individuals at the branch with the retail costs associated with the transaction.

 

[audreyh1]

Or they are like DW who ignores the maturity notices and lets them roll over into whatever the bank chooses. I gave up trying to change this behavior. BofA regular savings is .05 compared to ~1.5 at the online banks. Any suspicion of those?

This has been just amazing me over the past many years. And my conclusion is that these big banks have such a high deposit base that they don’t need to attract new deposits.

Although Chase was very generous with big bonuses for opening new accounts. Yet stays with the teeny teeny rates. Scratches head.

I suppose they count on inertia and ignorance.

 

[brucethebroker]

My guess is the brokers are getting a couple of basis points off the top to broker these. Still looks good to the consumer, because of the rates. The big banks can sucker the unwary person at the retail branches, but have to compete on a platform where yields are compared. Of course, they are placing millions of dollars with these as opposed to a few thousand each to individuals at the branch with the retail costs associated with the transaction.

This info from the Schwab website:

Benefits of Buying CDs at Schwab

Like bank CDs, CDs you purchase through Schwab earn a fixed rate of interest (if held to maturity) over a set period of time and are FDIC-insured. Plus, CDs can now be purchased at your convenience, 22 hours a day, seven days a week. Other benefits you won't get from a bank include:

Competitive rates and no fees
Schwab CD OneSource offers you a virtual one-stop marketplace for CDs, giving you access to some of the highest rates in the country—which you can easily compare by maturity and institution. Also, there are no hidden fees. For most CDs, there is no charge when you buy from Schwab. This is because the deposit institution itself pays Schwab a fee for distributing its CDs.

FDIC-insured for $250,000 per CD
If you purchase CDs directly from one or more banks, you're insured up to $250,000 total. A strategy to increase FDIC coverage is buying CDs from multiple banks through a company like Schwab.

 

[audreyh1]

This info from the Schwab website:

Benefits of Buying CDs at Schwab
Like bank CDs, CDs you purchase through Schwab earn a fixed rate of interest (if held to maturity) over a set period of time and are FDIC-insured. Plus, CDs can now be purchased at your convenience, 22 hours a day, seven days a week. Other benefits you won't get from a bank include:

Competitive rates and no fees
Schwab CD OneSource offers you a virtual one-stop marketplace for CDs, giving you access to some of the highest rates in the country—which you can easily compare by maturity and institution. Also, there are no hidden fees. For most CDs, there is no charge when you buy from Schwab. This is because the deposit institution itself pays Schwab a fee for distributing its CDs.

They did leave out a few things:

Buying online I can open a CD any day or time of the week and I have. So the last part of the first paragraph is a non-issue.

A couple of things I can do at a bank that I can’t at a brokerage:

1. Compound the interest paid inside the CD.
2. Often there is an early withdrawal option from the bank and sometimes the penalty is quite small and it is known upfront when I buy the CD. I don’t have to worry about selling in the secondary market.

So you just compare the rates, terms and tradeoffs each time you buy a CD.

 

[GravitySucks]

A new issue, sold through a brokerage, is a brokered CD.

https://www.investopedia.com/terms/b/brokered-cd.asp

You may be thinking of purchasing CDs through your brokerage on the secondary market - previously issued CDs which others are selling before maturity. Their prices/yields can be all over the place.

Oops. Yes I equated Secondary with Brokered.

 

[limeyx]

I am happy at Schwab, but would not consider buying off the web site. You can talk to a real bond specialist for free and discuss your needs and what is available with him (it's always been a "him" for me). Just for grins one time I brokerchecked the bond desk guy I was talking to and he had been in the business for 15 years. So these are not clerks or newbies IMO.

Thanks!

 

[Another Reader]

They did leave out a few things:

Buying online I can open a CD any day or time of the week and I have. So the last part of the first paragraph is a non-issue.

A couple of things I can do at a bank that I can’t at a brokerage:

1. Compound the interest paid inside the CD.
2. Often there is an early withdrawal option from the bank and sometimes the penalty is quite small and it is known upfront when I buy the CD. I don’t have to worry about selling in the secondary market.

So you just compare the rates, terms and tradeoffs each time you buy a CD.

If you compare APY instead of percent, you are comparing apples to apples. Most banks quote APY. Your 1.75 percent Ally CD may be a 1.74 percent CD compounded.

 

[jazz4cash]

It seems that this forum collectively has changed its tune on brokered CDs. That includes me! The credit unions many of us rely on haven't been so attractive lately. I think the criminally low rates at retail banks and upward trend for online rates has convinced me. It really helps when the broker is CS, VG, or Fido. I see the range of terms is much broader at Fido too. I don't see a 2yr on Ally's website but they have one through Fido. I was still unsure about the brokered CD compounding so thanks for clearing that up. I think I'm ready to take the plunge.

 

[audreyh1]

If you compare APY instead of percent, you are comparing apples to apples. Most banks quote APY. Your 1.75 percent Ally CD may be a 1.74 percent CD compounded.

Sure - that's how you compare between them. And be sure to compare APY.

I just like to leave my interest building in the CD, as opposed to receiving monthly/quarterly or semi-annual interest payments.

It's a minor issue.

 

[njhowie]

That's the secondary market. New issues CD's do not have fees.

Fidelity offers similar CD's and I have an easier time shopping on their website vs Schwab or Vanguard. Wells Fargo offers 2.4 percent for two years at Fidelity. I suspect the banks shave a basis point or 5 to pay Fido and Chuck to carry their products.

New issue Wells Fargo two year 3/30/2020 maturity going for 2.55% - happy days!

 

[kevink]

I'm a bit surprised to see so much focus on CD's instead of Treasuries in this otherwise excellent thread. It's very easy to buy T Bills at auction at no cost through the major brokerages. Rates are more than competitive with CD's - often better in real terms since interest on them is state tax exempt - and full faith and credit of the federal government is one layer more secure than FDIC insurance (it is in fact what backs the FDIC).

Good comparison in this article:

https://thefinancebuff.com/treasury-bills-cd-money-market.html

 

[OldShooter]

I'm a bit surprised to see so much focus on CD's instead of Treasuries in this otherwise excellent thread. It's very easy to buy T Bills at auction at no cost through the major brokerages. Rates are more than competitive with CD's ... l

Yeah. I've bought CDs at Schwab but have switched to T-bills because I think they are easier and cheaper to sell than CDs. Truthfully, I haven't had to test that theory tough.

 

[audreyh1]

I'm a bit surprised to see so much focus on CD's instead of Treasuries in this otherwise excellent thread. It's very easy to buy T Bills at auction at no cost through the major brokerages. Rates are more than competitive with CD's - often better in real terms since interest on them is state tax exempt - and full faith and credit of the federal government is one layer more secure than FDIC insurance (it is in fact what backs the FDIC).

Good comparison in this article:

https://thefinancebuff.com/treasury-bills-cd-money-market.html

Isn’t this a more recent phenomenon since interest rates have risen sharply in the past two months?

I’m pretty sure when I bought some in early Jan there wasn’t an equivalent 11 month at 1.75% and my CD was also no penalty, so I could withdraw at any time no hassles, no selling on secondary market.

We don’t pay state taxes so that benefit is for some states but not all.

 

[kevink]

Isn’t this a more recent phenomenon since interest rates have risen sharply in the past two months?

I’m pretty sure when I bought some in early Jan there wasn’t an equivalent 11 month at 1.75% and my CD was also no penalty, so I could withdraw at any time no hassles, no selling on secondary market.

We don’t pay state taxes so that benefit is for some states but not all.

As the article states, Treasuries have been outpacing CD's for about thee past year:

"Yields of Treasury bills have gone up quite a bit in the last year. Banks didn’t raise the rates on their CDs or savings accounts nearly as much. The yield on 3-month Treasury bills is now above 1.6%. The yield on 6-month Treasury bills is now above 1.8%."

Yes 7 states don't have income taxes but for most investors the state tax free nature of Treasuries is worth taking into account. They are also the ultimate in liquidity and safety in a market meltdown - more so than CDs. Treasury debt gets paid first, FDIC insured stuff second.

 

[jazz4cash]

The rates on T-bills are pretty good right now for 3, 6, and 9 months. Once you get out to 12 months the online banks and credit union CD specials are better even with the state tax exclusion (for me) and I don't really have much need for the shorter maturities.

 

[audreyh1]

The rates on short t-bills have moved up quite fast recently probably in anticipation of a Fed rate hike next week. On 3/1/18 the 1 and 3 month T-bills were 1.5% and 1.63% and many high yield savings accounts were already in that range. Today (two weeks later) they’ve already jumped to 1.7% and 1.77%. I expect that the high yield accounts wil follow suit before too long, as they have been doing over the recent past.

 

[limeyx]

I'm a bit surprised to see so much focus on CD's instead of Treasuries in this otherwise excellent thread. It's very easy to buy T Bills at auction at no cost through the major brokerages. Rates are more than competitive with CD's - often better in real terms since interest on them is state tax exempt - and full faith and credit of the federal government is one layer more secure than FDIC insurance (it is in fact what backs the FDIC).

Good comparison in this article:

https://thefinancebuff.com/treasury-bills-cd-money-market.html

Ah, I don't have any state taxes (these days) Kind of nice coming from California honestly ...

 

[Chuckanut]

FYI, From a 3/19 WSJ article:

The average rate on a one-year certificate of deposit, or CD, rose to 0.49% last week, according to Bankrate.com, a personal-finance website.

Those Schwab CDs along with Treasury Bills are looking pretty good in comparison. Now, maybe, can we get some rates that at least keep us even with inflation? After taxes?

 

[jazz4cash]

FYI, From a 3/19 WSJ article:

Those Schwab CDs along with Treasury Bills are looking pretty good in comparison. Now, maybe, can we get some rates that at least keep us even with inflation? After taxes?

The range of rates is so wide on retail bank CDs that reporting the average is almost meaningless. I wonder how WSJ (0.49) or Bankrate (1.93) do their surveys

BoA pays 0.07% for a 12 mo CD with $10k minimum.
Ally pays 1.75% for a 12 mo CD with less than $5k or 2.00% for more than $5k.

 

[audreyh1]

FYI, From a 3/19 WSJ article:

Those Schwab CDs along with Treasury Bills are looking pretty good in comparison. Now, maybe, can we get some rates that at least keep us even with inflation? After taxes?

Ignore the average rate.

What matters are the top rates offered. That's easy to find.

Way too many banks low-balling which pulls down the average rate.

 

[audreyh1]

The range of rates is so wide on retail bank CDs that reporting the average is almost meaningless. I wonder how WSJ (0.49) or Bankrate (1.93) do their surveys

BoA pays 0.07% for a 12 mo CD with $10k minimum.
Ally pays 1.75% for a 12 mo CD with less than $5k or 2.00% for more than $5k.

+1