Brokered CD's Not FDIC Insured - so says Investopedia

[Brook2]

Riddle me this.

"Brokered CDs are technically not FDIC-insured. However, the broker’s underlying CD purchase from the bank is insured. That makes it essential to buy them from a financially sound company."
https://www.investopedia.com/terms/b/brokered-cd.asp

My main interest in CD's is the FDIC insurance. These guidelines say to make sure to buy from a 'financially sound company' were the famous last words for patrons of SVB.

To me, as with stocks and bonds - there is a major difference between owning a mutual fund and a stock, and a bond fund and a bond.

 

[Car-Guy]

So why does Schwab say this on their CD page?


Protect your principal and earn a fixed rate of return with CDs from Schwab CD OneSource®

• One-stop marketplace for CDs
• Fixed-term: 30 days or more
• FDIC-insured up to $250,000 per depositor per bank
• Extended FDIC coverage by purchasing CDs from multiple banks
• Easy online transactions in your Schwab account or through a Fixed Income Specialist

 

[Chuckanut]

From Bankrate.com

Are brokered CDs FDIC insured?

Brokered CDs are typically insured by the FDIC up to $250,000 each. The fine print, however, is that not all brokerage firms partner with federally insured banks. To get FDIC coverage, the brokered CD must be from a federally insured bank.


It’s also possible to expand your FDIC coverage through brokered CDs. Since federal insurance covers $250,000 for each bank, someone who buys CDs from different banks and keeps them in a brokerage account will have separate insurance for each CD. For example, if you buy one CD for $200,000 issued by Bank of America and one CD for $150,000 issued by Wells Fargo, both CDs are fully insured by the FDIC. Then, you have $350,000 in total FDIC coverage. If both CDs were from the same bank, only $250,000 of the total amount would be covered.

 

[pb4uski]

Riddle me this.

"Brokered CDs are technically not FDIC-insured. However, the broker’s underlying CD purchase from the bank is insured. That makes it essential to buy them from a financially sound company."
https://www.investopedia.com/terms/b/brokered-cd.asp

My main interest in CD's is the FDIC insurance. These guidelines say to make sure to buy from a 'financially sound company' were the famous last words for patrons of SVB.

To me, as with stocks and bonds - there is a major difference between owning a mutual fund and a stock, and a bond fund and a bond.

Investopedia is wrong. As long as the CD is FDIC insured and you are not exceeding the FDIC limits by owning more than $250k in one FDIC insured bank then you are all set.

 

[MarieIG]

https://www.investopedia.com/fdic-rules-for-cds-5271560

And I found this from Investopedia re: FDIC insurance:

Is My Brokered CD FDIC-Insured?
Unlike CDs available at banking institutions, brokered CDs must be purchased from brokerage firms and independent salespeople. If the brokered CD is set up in your name with an FDIC-insured bank, it will be covered by the FDIC up to the $250,000 limit per depositor, per FDIC-insured bank, per ownership category.


However, if the bank isn't FDIC-insured, it won't be covered. . .

 

[pb4uski]

and it says, in part:

Is My Brokered CD FDIC-Insured?
Unlike CDs available at banking institutions, brokered CDs must be purchased from brokerage firms and independent salespeople. If the brokered CD is set up in your name with an FDIC-insured bank, it will be covered by the FDIC up to the $250,000 limit per depositor, per FDIC-insured bank, per ownership category.

However, if the bank isn't FDIC-insured, it won't be covered. It’s important to find out beforehand where the brokered CD will be set up to ensure proper FDIC coverage.

(emphasis added)

 

[Brook2]

and it says, in part:

(emphasis added)

But the words in my OP say financially sound "company", not "bank" - so in this case, the way I read it, it is the brokerage they are referring to. Having an institutional layer (brokerage) between a buyer and a bank could be an unstable obstacle if the brokerage goes bankrupt (or whatever) and all assets get frozen. It's not like the bank sent us a CD in the mail.

 

[Dtail]

Investopedia is wrong. As long as the CD is FDIC insured and you are not exceeding the FDIC limits by owning more than $250k in one FDIC insured bank then you are all set.

So is the question really do all major brokerage firms sell Brokered CD's from ONLY FDIC insured banks?

 

[Closet_Gamer]

Interesting and timely. I was looking at CDs today and it does appear that banks with lower rated debt are having to sell CDs at higher interest rates. Schwab shows them as FDIC insured ... but I admit the shaky banks made me avoid clicking "buy".

I think its really a question of whether there is any major disruption in ability to get the money. I doubt it.

And yet I still didn't click "buy"...

 

[Car-Guy]

So is the question really do all major brokerage firms sell Brokered CD's from ONLY FDIC insured banks?

I don't know, but I always check... But that's me.

 

[NomDeER]

But the words in my OP say financially sound "company", not "bank" - so in this case, the way I read it, it is the brokerage they are referring to. Having an institutional layer (brokerage) between a buyer and a bank could be an unstable obstacle if the brokerage goes bankrupt (or whatever) and all assets get frozen. It's not like the bank sent us a CD in the mail.

If the big brokerages go bankrupt, we've all got much bigger problems.

The real problem is that the part of your original post that said that brokered CDs are technically not FDIC-insured is incorrect. There may be some brokerages that sell CDs that are not FDIC insured. But, the major brokerages like Vanguard sell only FDIC insured CDs. It's easy enough to check when you buy the CD.

I happened to be on the phone with the Vanguard fixed income desk today and asked them about the FDIC and Vanguard brokered CDs.
The representative told me that they only sell FDIC insured CDs and that, for FDIC insurance purposes, the only difference between buying a brokered FDIC insured CD and buying an FDIC insured CD directly from the bank is what the CD owner has to do. If you have a brokered CD, then the brokerage is the one who works with the FDIC to get the money and Vanguard will contact you and explain what is happening and what your options are. If it's a CD bought directly from the bank, you may have to deal with the FDIC yourself. Personally, I see that as a pro for brokered CDs, not a con.

 

[pb4uski]

But the words in my OP say financially sound "company", not "bank" - so in this case, the way I read it, it is the brokerage they are referring to. Having an institutional layer (brokerage) between a buyer and a bank could be an unstable obstacle if the brokerage goes bankrupt (or whatever) and all assets get frozen. It's not like the bank sent us a CD in the mail.

But I thought that we had already established that the Investopedia quote in the OP was wrong. It's also poorly written in that it is unclear whether the "company" is the bank or the brokerage firm. Both banks and brokerage firms are companies, right?

Have you ever considered getting a hobby? [emoji4]

 

[Brook2]

But I thought that we had already established that the Investopedia quote in the OP was wrong. It's also poorly written in that it is unclear whether the "company" is the bank or the brokerage firm. Both banks and brokerage firms are companies, right?

Have you ever considered getting a hobby? [emoji4]

Not sure if you are rereading something twice or who you are responding to. If it is me, I attempt to asking serious questions to learn something - which I thought was something to be welcomed here.

 

[pb4uski]

Not sure if you are rereading something twice or who you are responding to. If it is me, I attempt to asking serious questions to learn something - which I thought was something to be welcomed here.

Given that I quoted your post in my response isn't it clear that I was responding to you? That's the way these things usually work.

Was this "serious question" serious enough for you to pick up the phone and talk with your broker? If so, what did they tell you? Please share.

Reading through this thread it seems that your question was asked and answered my numerous forum members.

 

[Brook2]

Given that I quoted your post in my response isn't it clear that I was responding to you? That's the way these things usually work.

Was this "serious question" serious enough for you to pick up the phone and talk with your broker? If so, what did they tell you? Please share.

Reading through this thread it seems that your question was asked and answered my numerous forum members.

@pb4uski I invite you to ignore my posts.

Everyone else here has been really helpful and I've learned a lot. I want to take this time to thank you all. It's great hearing different perspectives and opinions, especially when information is conflicting. I've always believed that you should never buy something you don't understand, and education is more important than any investment.

 

[pb4uski]

Your initial concern was:

Riddle me this.

"Brokered CDs are technically not FDIC-insured. However, the broker’s underlying CD purchase from the bank is insured. That makes it essential to buy them from a financially sound company."
https://www.investopedia.com/terms/b/brokered-cd.asp

My main interest in CD's is the FDIC insurance. These guidelines say to make sure to buy from a 'financially sound company' were the famous last words for patrons of SVB.

To me, as with stocks and bonds - there is a major difference between owning a mutual fund and a stock, and a bond fund and a bond.

I think that many of us opined that the investopedia advice was wrong. It is NOT the broker's underlying CD purchase from the bank that is insured because the broker does NOT purchase CDs from the bank... just like a broker does not purchase stock from a publicly listed company... the broker is an agent in the sale (and receives a commission) and is also the custodian (keeps records of what you own, transactions, etc).

Technically, there is no need to buy from a financially sound bank or broker... in the case of a bank as long as you stay within the FDIC coverage limits. Worst case you might have to wait a few days for access to your money if your CD happens to mature when the SHTF. Are you aware that no SVB customers lost a dime and in particular, those under the FDIC coverage limits wouldn't have lost a dime even if the Feds had not taken extraordinary measures as they did. But that is all a bit academic in that the vast majority forum members are dealing with large, reputable, well-known brokerage firms like Schwab, Fidelity, Vanguard, Merrill Lynch, etc. and I'm pretty sure that none of them sell brokered CDs that are not FDIC insured (Note: it is your responsibility to make sure that you stay within the coverage limits... they can't do that because you may have brokered CDs at different brokerage firms so they have no way of tracking that for you).

Secondly, the broker is the custodian of your brokered CDs. If the brokerage "lost" your brokered CD then SPIC coverage would apply.

Besides, the SVB accounts that were at concern in the news and were causing the run on the bank were demand deposits, not CDs (which are time deposits and not demand deposits).

You said that your main interest was FDIC insurance and a number of members posted that there was no need to worry.

And finally, as other members have pointed out in this thread and the other similar thread that you started, there isn't as much difference between buying stock from a broker or CDs from a broker as you think. In both cases the broker is a sales agent and also the custodian of the shares of stock or brokered CDs or bonds on your behalf.

So I guess the lesson learned is don't believe everything that you read on the internet... especially investopedia IME... check with numerous different sources.

But the best source of information on investments that you don't understand is your broker rather than SGOTI.

 

[RobbieB]

I agree. Why do you keep asking us, some nameless faceless people you will never meet or ever know?

Yeah, call your broker.