Who Knew? Schwab 3rd party CD's

[Dtail]

Last time I looked at brokered CDs (maybe ten yrs ago), many/most of them were callable. That really put me off.

What's it look like now?

On Fidelity, the majority are not callable.

 

[Dawg52]

Last time I looked at brokered CDs (maybe ten yrs ago), many/most of them were callable. That really put me off.

What's it look like now?

Most are not.

 

[bobandsherry]

1. Because the rates on brokered CDs are generally higher. If I walk in to my local bank and look at the rate board, they are laughable...still under 1%.

2. Because buying through your brokerage account is as easy as clicking a few buttons. If you buy directly from a bank, it's generally more involved. Do it in person, there's paperwork and it can take 30 minutes. Do it online with a bank where you don't already have an account and it takes time.

3. Because you have enormously more options as far as the maturity date, and the type of CD (callable/non-callable, step, even zero coupon).

4. With brokered CDs, you have hundreds of banks you could buy through on one screen. It's easy to spread your money across many banks with minimal effort. If you have a large account, this comes in handy so as not to breech FDIC limits at any one bank.

5. If you want to buy CDs in your IRA or other brokerage account obviously it will be easier and/or required to do it through the brokerage.

6. If you buy secondary market CDs, rates are not fixed, it's what someone is willing to sell for. On any particular day I can find CDs yielding 0.1% to 0.25% over the equivalent maturity new issue, even after commission. Additionally, there are a couple thousand CDs available through secondary market at any point in time, so there is much more choice.

7. With secondary market CDs rates are updated in real-time. When you buy from a bank, their CD rates are updated maybe weekly at best. Most times it's less frequently.

Pphhtt.. is that all... [emoji39]

 

[adrift]

How do you find out what fees are involved in the secondary market. Or is comparing yield to maturity all that matters?

You buy these in increments of $1000. Often, there's a minimum purchase amount. For Fidelity, the fee is $1 per $1000. It's a little more complicated than looking at the yield to maturity on the search page. It doesn't include the fee. But, part way through the purchase, it will show you the yield including the fee. The effect of the fee on the yield will vary by the length of the CD. At first approximation, I believe the fee would ding your yield about .1% on a 1 year CD and .05% on a two year CD, etc.

On Vanguard, I'm not sure, but, I think the fee is $1/$1000 if you a Voyager or above and $2/$1000 otherwise.

 

[jetpack]

Things I like about brokered CD's

1. Higher rates
2. Easier to buy
3. Automatic redeems. (no rollover instructions needed)
4. easier to create a nice ladder
5. can buy from multiple banks w/ one account
6. can actually sell for more than you bought for if rates go down.

 

[audreyh1]

Yeah, there's no compounding of interest in either case. The interest is deposited in your sweep or mm account. You have various options of monthly, semi, or annual payments depending on the terms. At least the Vanguard MM and Fido MM are paying something between 1.3- 1.5%.

Thanks. This could be an issue on those longer higher interest rate CDs.

If you’re paid annually, by not compounded - yuck.

 

[audreyh1]

Last time I looked at brokered CDs (maybe ten yrs ago), many/most of them were callable. That really put me off.

What's it look like now?

Yeah a concern for me too.

On Fidelity, the majority are not callable.

Most are not.

Thanks.

 

[audreyh1]

You buy these in increments of $1000. Often, there's a minimum purchase amount. For Fidelity, the fee is $1 per $1000. It's a little more complicated than looking at the yield to maturity on the search page. It doesn't include the fee. But, part way through the purchase, it will show you the yield including the fee. The effect of the fee on the yield will vary by the length of the CD. At first approximation, I believe the fee would ding your yield about .1% on a 1 year CD and .05% on a two year CD, etc.

On Vanguard, I'm not sure, but, I think the fee is $1/$1000 if you a Voyager or above and $2/$1000 otherwise.

Thanks (I think).

So yield to maturity doesn’t include the fee.

You have to initiate the purchase to see the effect of the fees for your effective yield.

 

[Ready]

I took a quick look at the Fidelity web site and see that they are offering a 5 year brokered CD at 2.65%.

Looking at bankrate.com, I see Capital One is offering the same 5 year CD at 2.65%.

But there is a big difference. If I buy from Capital One and decide to terminate early, my penalty is capped at a fixed 6 months of interest. If I terminate early from Fidelity I have to sell on the open market. If interests rates rise (which they are predicted to do), I will likely pay a substantially higher penalty than six months of interest. For that reason, I would expect the rates of a brokered CD to be higher than a bank CD.

But for as long as I've been watching them, they never have been higher than bank CDs. People like the convenience of buying a CD from their existing brokerage account. But they generally look at shorter term CDs because it doesn't make sense to lock up your money at such low rates right now for five years. But if you buy direct from the bank, a 5 year CD is a great deal.

Even if you only hold the CD for one year and pay a six month penalty, you still earned 1.325%. And if you hold it for two years, you earned 2%. But if rates don't go up and you want to hold it longer, you will have earned more than the brokered CD.

I buy CDs to avoid interest rate sensitivity risk. CD interest is taxed at ordinary income rather than CG rates. Bonds are taxed at the lower CG rates but carry interest rate sensitivity. A brokered CD is the worst of both - interest rate sensitivity and ordinary income tax rates.

 

[adrift]

Thanks. This could be an issue on those longer higher interest rate CDs.

If you’re paid annually, by not compounded - yuck.

Brokered CDs tend to compound either monthly or semi-annually.

Getting paid out as they compound can redound to your benefit in a raising rate environment. It appears we're in such an environment now.

 

[Another Reader]

In bank products I believe you are comparing the APY among products. If you see a rate at a bank, it should be the compounded rate. The actual interest rate is lower than the compounded APY. At the brokers, the interest is not compounded. As I understand it, that just means the rate is a little higher to make up for the lack of compounding.

I don't buy secondary market CD's. Too complicated. I prefer to have only three parties to the transaction, me the bank, and the broker. Simple paper trail and more accountability.

ETA: Here's the Ally webpage showing the compounded interest rate for their CD's.

https://www.ally.com/bank/cd-rates/

 

[audreyh1]

Brokered CDs tend to compound either monthly or semi-annually.

Getting paid out as they compound can redound to your benefit in a raising rate environment. It appears we're in such an environment now.

I thought someone just said brokered CDs didn’t compound.

Did you mean they pay interest monthly or semi-annually?

 

[adrift]

But there is a big difference. If I buy from Capital One and decide to terminate early, my penalty is capped at a fixed 6 months of interest. If I terminate early from Fidelity I have to sell on the open market. If interests rates rise (which they are predicted to do), I will likely pay a substantially higher penalty than six months of interest. For that reason, I would expect the rates of a brokered CD to be higher than a bank CD.

If you want to sell a brokered before CD maturity, you'll take an additional hit beyond the interest rate effect. There's a lot of friction selling on the secondary market.

It's probably a bad idea to buy these if you're not going to hold to maturity.

 

[adrift]

I thought someone just said brokered CDs didn’t compound.

Did you mean they pay interest monthly or semi-annually?

Yeah. My terminology was sloppy. It's what you said.

 

[Ready]

Brokered CDs typically pay interest semi-annually into a sweep account. They are not reinvested.

 

[foxfirev5]

You buy these in increments of $1000. Often, there's a minimum purchase amount. For Fidelity, the fee is $1 per $1000. It's a little more complicated than looking at the yield to maturity on the search page. It doesn't include the fee. But, part way through the purchase, it will show you the yield including the fee. The effect of the fee on the yield will vary by the length of the CD. At first approximation, I believe the fee would ding your yield about .1% on a 1 year CD and .05% on a two year CD, etc.

On Vanguard, I'm not sure, but, I think the fee is $1/$1000 if you a Voyager or above and $2/$1000 otherwise.

At Fido, the fee is only for secondary purchases. New issues do not have a fee.

 

[audreyh1]

But for as long as I've been watching them, they never have been higher than bank CDs. People like the convenience of buying a CD from their existing brokerage account. But they generally look at shorter term CDs because it doesn't make sense to lock up your money at such low rates right now for five years. But if you buy direct from the bank, a 5 year CD is a great deal.

Even if you only hold the CD for one year and pay a six month penalty, you still earned 1.325%. And if you hold it for two years, you earned 2%. But if rates don't go up and you want to hold it longer, you will have earned more than the brokered CD.

I buy CDs to avoid interest rate sensitivity risk. CD interest is taxed at ordinary income rather than CG rates. Bonds are taxed at the [-]lower CG rates[/-] but carry interest rate sensitivity. A brokered CD is the worst of both - interest rate sensitivity and ordinary income tax rates.

My very sporadic checks over the years hadn’t show the current situation of higher CD rate offerings through brokers.

I currently hold mostly 11 month no penalty CDs at 1.75% and 5 year CDs (two different CUs) at 3% - compounding happily. I treat the no penalty CDs as a souped up high yield savings account since I can trade up to a higher rate if it becomes available and I can withdraw the funds t any time.

Pssst - bond dividends are taxed at ordinary income rates. Bond dividends are not qualified.

 

[jazz4cash]

Ready says " buy CDs to avoid interest rate sensitivity risk. CD interest is taxed at ordinary income rather than CG rates. Bonds are taxed at the lower CG rates but carry interest rate sensitivity. A brokered CD is the worst of both - interest rate sensitivity and ordinary income tax rates".

I thought bond interest is taxed at the ordinary income tax rate.

 

[Ready]

If you want to sell a brokered before CD maturity, you'll take an additional hit beyond the interest rate effect. There's a lot of friction selling on the secondary market.

It's probably a bad idea to buy these if you're not going to hold to maturity.

Good point. This is why people tend to buy shorter term CDs through brokers and plan to hold until maturity. But this is not the best investing strategy. Buying the 5 year CD from a bank with a fixed 6 month early term penalty will almost always be a better deal, and you can sleep at night not having to worry about how much of a hit you will take if you sell early.

And why wouldn't you sell early if rates go up significantly? If in two years rates jump to 4%, I'm glad to pay six months interest at 1.325% and reinvest at 4%. You can't do that with bonds or brokered CDs.

 

[audreyh1]

At Fido, the fee is only for secondary purchases. New issues do not have a fee.

adrift was answering my question of how to see effects of fees on secondary purchases.

 

[Ready]

Audreyh1, jazz4cash - thanks for catching my error. I only have municipal bonds in my taxable accounts so I pay no taxes on them. But yes, other types of bonds are taxed at ordinary income tax rates.

 

[Mr._Graybeard]

Thanks (I think).

So yield to maturity doesn’t include the fee.

You have to initiate the purchase to see the effect of the fees for your effective yield.

Schwab doesn't have a fee that depositors pay. According to their disclosure, though, they can charge a fee to the issuer, which may be reflected in the interest rate.

 

[jazz4cash]

This thread is timely. Last year when I moved IRA funds to the credit union, the Fido rep asked about the transaction and said " we have some pretty good <brokered> CD rates". I took a look but they were not competitive with the credit union specials and the better rates were from obscure banks. That has all changed with the brokered CDs offering competitive rates from well known issuers. That plus the hassle of spreading IRA funds among a handful of banks/CUs makes the brokered CD option at Fido much more attractive to me. I've been extremely disappointed with the slow response and errors at NFCU so it may be time for me to dip a toe into the brokered CD pool at Fido.

 

[audreyh1]

Schwab doesn't have a fee that depositors pay. According to their disclosure, though, they can charge a fee to the issuer, which may be reflected in the interest rate.

I assume this is for new issue CDs.

I was asking about how to see the fees in terms of hit to yield to maturity on a secondary market CD. The issuer is not involved in that case.

 

[audreyh1]

This thread is timely. Last year when I moved IRA funds to the credit union, the Fido rep asked about the transaction and said " we have some pretty good <brokered> CD rates". I took a look but they were not competitive with the credit union specials and the better rates were from obscure banks. That has all changed with the brokered CDs offering competitive rates from well known issuers. That plus the hassle of spreading IRA funds among a handful of banks/CUs makes the brokered CD option at Fido much more attractive to me. I've been extremely disappointed with the slow response and errors at NFCU so it may be time for me to dip a toe into the brokered CD pool at Fido.

Interesting. So this is all a big change from a year ago?

I was wondering how out of date I was. Maybe not so bad?

I loaded up on some 3% 5 yr CDs about a year ago (Andrews FCU). I think these have a 6 month interest penalty for early withdrawal.

My PenFed 5 year 3% CDs are maturing this December. Maybe just in time to see a higher offering, finally?