Question on Brokered CD's - who really owns them?

[Brook2]

Ok I know this forum tends to slip up and be snarky- but be nice because I’m a beginner at CDs and have questions I can't find answers to on searches. I'm also ER, so I think it's better to ask here than other forums.

I'm trying to understand (beyond a surface level) the concept of brokered CD’s.

When I buy a brokered CD from Vanguard, my understanding is that a bank sold Vanguard a bunch of their CDs as a package, and VG is distributing them out for us to buy.

But once VG sells us an individual CD from a bank, why isn’t our primary relationship with the bank, and not Vanguard ?

Goofy analogy/example, when you buy a used car from a guy, the ownership is turned over to you. Therefore you can get it worked on at any garage or resell it if you want. You don’t have to go back to the guy you bought it from (Vanguard) to make the arrangements.

Why doesn’t the bank pay us directly? Are they paying Vanguard first and then Vanguard pays us? Does the bank just send VG a fat check and they have to figure out who gets what and when (like a bookkeeper)?That doesn’t feel like you actually bought a CD from a bank. It feels like you bought the guy AND the car together.

My understanding is you can't go the bank you bought it from through VG and ask them about your specific CD you bought - nor can you make arrangements with the bank to extend it or return it early. Perhaps they don't even have any record with your name on file.

I'm not asking for personal financial advice of what to do, or the best way to invest in cds- I'm just trying to understand the structure of how things work with brokered Cds.

With mutual funds, I understand why VG is the middle man because they are buying a ton of funds and mixing a soup together, but when it comes to an individual CD (car), I don't understand why I have to go back to the guy (VG) if I want to make my own arrangements/communication with the bank (mechanic) directly.

 

[slowsaver]

If you see a brokered (new issue) CD you like on Vanguard, you can go to that bank's web site and open an account and buy the CD. Is that the relationship you want to have with the bank?

I know this doesn't really answer your question. But, I will say that I like that I don't have to open an account with every bank I want to buy a CD from. I like that those banks don't have my personal information so that they can send me a check directly.

Do you have the same question when you buy an individual stock (not a mutual fund) from a broker?

 

[pb4uski]

If you buy a stock or ETF or even a mutual fund from a brokerage firm the communications from the company flow through your broker, dividends are paid into your brokerage account, etc. A CD or bond isn't any different.

And the bank didn't sell the CDs to Vanguard, rather it made them available for Vanguard to sell to their clients and Vanguard receives a commission on each sale.

 

[audreyh1]

It’s a lot less work for a bank to sell CDs to retail investors through a broker, rather than directly. Think wholesale versus retail. That’s why banks offer more attractive rates through a broker as well as paying the broker for the service. The broker takes care of the retail investor - collecting and distributing funds and interest, record keeping and tax paperwork, dealing with the FDIC if it ever comes to that.

You simply won’t find the same CD rates going directly to the bank. It’s up to you which relationship you would prefer.

 

[Brook2]

It’s a lot less work for a bank to sell CDs to retail investors through a broker, rather than directly. Think wholesale versus retail. That’s why banks offer more attractive rates through a broker as well as paying the broker for the service. The broker takes care of the retail investor - collecting and distributing funds and interest, record keeping and tax paperwork, dealing with the FDIC if it ever comes to that.

You simply won’t find the same CD rates going directly to the bank. It’s up to you which relationship you would prefer.

But what if you bought it through VG and then wanted to approach the bank directly afterward about extending, refunding, etc -- I'm not saying I'm interested in that - I'm just wondering if that is allowed or if they even have record of you - of if once you buy it through VG you can't make any arrangement with the bank directly

 

[Brook2]

the bank didn't sell the CDs to Vanguard.

This quote seems to say otherwise. Your thoughts?

"How does a brokered CD work?
Brokered CDs are issued by banks and sold in bulk to investment firms and brokerages where they become available to investors for purchase. By doing this, the broker brings a lot of money to the bank, which often results in higher APYs than you can get with a traditional CD."
https://www.cnbc.com/select/what-are-brokered-cds/

 

[audreyh1]

But what if you bought it through VG and then wanted to approach the bank directly afterward about extending, refunding, etc -- I'm not saying I'm interested in that - I'm just wondering if that is allowed or if they even have record of you - of if once you buy it through VG you can't make any arrangement with the bank directly

Not an option. They don’t have a record of you with respect to that CD, that’s the broker’s job.

 

[Brook2]

Not an option. They don’t have a record of you with respect to that CD, that’s the broker’s job.

So if our name is not recorded in the records of the bank, if the Bank looks down at its record book to see who the owner of the CD is, it will all say Vanguard? It seems there must be some owner on record or they would not know who to pay interest to.

If it does say Vanguard, then that means we are not really depositing our money in the bank? Instead we are giving it to Vanguard - and VG is buying the CDs from their account (cash, whatever).

 

[badatmath]

I have to say I don't quite see the issue. I think to me its better to just give my personal info to one place, not 10.

 

[Brook2]

I have to say I don't quite see the issue. I think to me its better to just give my personal info to one place, not 10.

I'm not trying to make a decision or ask for financial advice, I'm trying to understand how the system works, for my own education.

 

[RobbieB]

I understand it. The broker is the agent and you deal with the agent. That's why the banks pays the agent so they don't have to deal with you.

You want to deal with the bank, then buy from the bank.

 

[pb4uski]

This quote seems to say otherwise. Your thoughts?



"How does a brokered CD work?

Brokered CDs are issued by banks and sold in bulk to investment firms and brokerages where they become available to investors for purchase. By doing this, the broker brings a lot of money to the bank, which often results in higher APYs than you can get with a traditional CD."

https://www.cnbc.com/select/what-are-brokered-cds/

My thoughts. CNBC mischaracterized it. If they had written "through investment firms" instead of "to investment firms" then it would be correct.

 

[pb4uski]

So if our name is not recorded in the records of the bank, if the Bank looks down at its record book to see who the owner of the CD is, it will all say Vanguard? It seems there must be some owner on record or they would not know who to pay interest to.

If it does say Vanguard, then that means we are not really depositing our money in the bank? Instead we are giving it to Vanguard - and VG is buying the CDs from their account (cash, whatever).

Let it go. That's why the call them brokered CDs rather than bank CDs.

 

[jazz4cash]

If you see a brokered (new issue) CD you like on Vanguard, you can go to that bank's web site and open an account and buy the CD. Is that the relationship you want to have with the bank?

I know this doesn't really answer your question. But, I will say that I like that I don't have to open an account with every bank I want to buy a CD from. I like that those banks don't have my personal information so that they can send me a check directly.

Do you have the same question when you buy an individual stock (not a mutual fund) from a broker?

If you go directly to the issuing bank, you probably will not find the same terms. Interest rates will be much lower. The products are not the same. Bank CDs purchased directly have early withdrawal penalties and generally are not callable. Brokered CDs have varying terms of call protection. To sell a brokered CD prior to maturity you must sell into the secondary market. You could gain or lose but you won't know in advance what you will get when you sell. Right now City National has 5yr brokered CDs for 5% but the rate on their website is .8%

 

[NomDeER]

I'm not trying to make a decision or ask for financial advice, I'm trying to understand how the system works, for my own education.

I think people are explaining to you the benefits of brokered CDs because your original post seemed to be complaining about the nature of brokered CDs.

Also, generally, when people want to understand how things work, it is to help them make a decision. It's not clear why it matters whether a brokerage is buying and reselling CDs or acting as an agent because the bank ultimately is responsible for your deposits. That's why the brokerages are working with the FDIC to get the money for their clients who bought brokered CDs from FDIC insured failed banks SBC and Signature. The brokerages are not just paying people out of their own money.

There obviously is a record of the brokerage client's CD ownership, and it's not clear why you care whether your name appears in some computer at the bank as well as at the brokerage. What difference does it make to your investment decision? For most people, the specific issue of where their names are recorded isn't important because the information clearly is recorded with the people who need it in order to return your money, pay your interest, get FDIC insurance, and issue your tax forms. If this piece of information is merely one of curiosity, then contact your brokerage. But, they'll probably start explaining matters relevant to investment decisions as well.

 

[audreyh1]

So if our name is not recorded in the records of the bank, if the Bank looks down at its record book to see who the owner of the CD is, it will all say Vanguard? It seems there must be some owner on record or they would not know who to pay interest to.

If it does say Vanguard, then that means we are not really depositing our money in the bank? Instead we are giving it to Vanguard - and VG is buying the CDs from their account (cash, whatever).

Your money is deposited in the bank and interest payments and principal return come from the bank. It’s like owning stocks in “street name” - through a brokerage account rather than holding the stock certificates personally. The broker is handling all the record keeping for securities you own in your account. They are just the record keeper and money pass through. They don’t own what’s in your account, they hold them for you. The banks just need to know that brokerage A clients own these X CDs.

It’s really important to understand what a broker does for their clients.

 

[Brook2]

Your money is deposited in the bank and interest payments and principal return comes from the bank. It’s like owning stocks in “street name” - though a brokerage account rather than holding the stock certificates personally. The broker is handling all the record keeping for securities you own in your account. They are just the record keeper and money pass through. They don’t own what’s in your account, they hold them for you. The banks just needs to know that brokerage A clients own these X CDs.

It’s really important to understand what a broker does for their clients.

This person answered the crux of my questions of explaining the process. Thanks everyone for trying to help.

Just want to clarify for anyone who is frustrated by my questions - I'm just trying to learn something most people (beyond this thread) have not been able to answer for me. I'm not on the edge of any stressful financial decisions. I always think it's ideal to understand something, especially in the realm of investing. And I actually find bonds and CD's way more complex than stocks - especially when there are more than one institution involved (such as brokers). I've bought these things directly from the issuers in the past, but not brokers. That's why I ask.

 

[jim584672]

The "street name" owner is Cede & Co..

 

[Backpacker]

Audreyh1 answered best. In my banking days we used the term "safekeeping" this describes the relationship between us and the trusted broker that managed our inventory of investments. ( yes banks have CD's with other banks) If it puts your mind at ease back in the 09 financial mess, we had several CD's at failed banks. Never more than $250k, and when bank failed we received our funds very quickly. Usually within 10 days or so.

 

[Out of Steam]

Even if the brokered CD was in the name of the broker at the bank, wouldn't the asset (including any FDIC repayment of it) be protected by the SIPC insurance of a legitimate brokerage firm such as Vanguard?

 

[copyright1997reloaded]

The relationship between you and the issuing bank is indirect, via the brokerage. FDIC insurance occurs because the brokerage titles the asset as a custodian, e.g. "Schwab Brokerage as custodian for Clients". Thus, the asset is yours but is held by the custodian. This is why your direct deposits for a particular bank is added to those held in a custodial relationship (in terms of FDIC limits).

This also complicates/delays potential disbursement in case of a bank failure. The FDIC has to contact the broker (who has the relationship with the failing bank) and get the name and amount of each of the CD investors. After this, the FDIC will send the insurance check to the broker, who will in turn disburse to their clients. This last part (disbursement of the proceeds) is outside of the purview of the FDIC.

I have lots of brokered CD's, so I am "not too worried" about the above....but I believe we should all be aware of what the real deal is vs. blanket statements.

ETA: The above is known as "pass-through" insurance.

 

[HealthyFuture]

Brook2, I found this thread very helpful to my learning, so I’m really glad you asked the questions. It’s hard for me to explain to others (DW, DM) why I make certain recommendations if I can’t answer some of their questions which are like those you posed. Thank you for starting this thread!

 

[audreyh1]

Even if the brokered CD was in the name of the broker at the bank, wouldn't the asset (including any FDIC repayment of it) be protected by the SIPC insurance of a legitimate brokerage firm such as Vanguard?

No, it’s covered by FDIC insurance, not SIPC. The CD is still on deposit at the issuing bank. Your brokerage holdings, the individual securities, are not insured by SIPC. SIPC insurance coverage is for when a brokerage fails/goes bankrupt or some securities go missing from your account.

 

[jim584672]

If you asked the bank who is the legal owner of the Brokered CDs it is Cede & Co. Not you, not your Broker. Cede is the legal owner, all sub-derivative rights flow down to the beneficial owner by contractual agreements from you to the Broker, to DTCC, and the nominee of Cede & Co.

 

[Mulligan]

I have to say I don't quite see the issue. I think to me its better to just give my personal info to one place, not 10.

Yes, its nothing to be worried about. In fact your closer to “owning the CD”, than you are owning your stocks. As many may not even know that any stock in your brokerage account isnt even owned by yourself. Its in street name through brokerage and furthermore Cede and Co. is technically the owner of all common stocks outstanding.
Added…. Jim, I just saw your post, I’m too late, ha.