Who Knew? Schwab 3rd party CD's

[audreyh1]

No money market mutual fund can guarantee that it will maintain $1. All contain a disclaimer that it might break the buck. I believe you may be confusing this with the recent SEC rule changes.

Those rule changes allow an institutional MM fund's NAV to float but people invest in "retail" funds which are exempt. The rule change that applies to people are the liquidity restrictions on non-government (prime) money market funds.

Right, thanks, it’s not a floating NAV for retail funds, the distinction is the liquidity restrictions and whether a fund can disallow folks from withdrawing funds during times of stress or impose a redemption fee (from Fidelity):

Specifically, if a fund’s weekly liquid assets were to fall below 30%, the board of directors of a prime (general purpose) fund or a municipal fund may either charge a liquidity fee of up to 2% on shareholder redemptions or impose a halt on all shareholder redemptions (known as a “gate”) for no longer than 10 days. Additionally, if weekly liquid assets were to fall below 10%, a prime or municipal fund must impose a liquidity fee of 1%, unless the fund’s board determines that such a fee is not in the fund’s best interests. These liquidity fee and redemption gate requirements apply to both retail and institutional funds. Government and U.S. Treasury money market mutual funds will not be subject to liquidity fees or redemption gates.

I was referring to the latest SEC changes and that there was a material difference between the two classes of MM funds available to the retail investor, and when comparing yields the difference should be noted. I just forgot that the floating NAV was confined to non-retail MMs.

 

[Chuckanut]

I want to thank the OP and those who have contributed to this discussion.

It has opened my eyes and I have purchased a few short term CD's and upped the interest I will earn this year. It's just pizza and beer money, but I do like good pizza and good beer.

 

[Gotadimple]

Audrey,
Re: compounding - my error. Here is Schwab's statement regarding compounding:

"Interest on CDs is not compounded. Interest on CDs in the primary
market is calculated on the basis of the actual number of days elapsed
over a 365-day year."

This snippet came from the disclosures statement in the CDs & Money Markets section.

- Rita

 

[retired1]

I think most large brokerages buy/sell CDs in the secondary market. Rates are good. As long as you hold till maturity, it's a good deal (I think)

 

[audreyh1]

Audrey,
Re: compounding - my error. Here is Schwab's statement regarding compounding:

"Interest on CDs is not compounded. Interest on CDs in the primary
market is calculated on the basis of the actual number of days elapsed
over a 365-day year."

This snippet came from the disclosures statement in the CDs & Money Markets section.

- Rita

OK - so they really are paying simple interest.

And thanks adrift for the detailed explanation and example. I had missed that earlier.

 

[Chuckanut]

I noticed the CDs go up and down in value a bit. Is this normal?

 

[njhowie]

I noticed the CDs go up and down in value a bit. Is this normal?

Technically, all CDs go up and down in value. A CD is just a specific type of bond, and day to day its value will fluctuate based on interest rates and market conditions.

Anyone who holds CDs in a brokerage account is aware of this. Like any bond holdings, at the end of every day they are marked to market. For the investor who will hold the CD to maturity it is little more than noise. It's really only of interest if you are looking to sell, as it gives you an idea of what the value is likely to be in the market at that time.

 

[Chuckanut]

Yes, that should have been obvious to me since they are bought and sold in a market place. Maybe I need another cup of morning coffee to get the brain working.

 

[audreyh1]

I noticed the CDs go up and down in value a bit. Is this normal?

If you hold them at a brokerage, you are at a place that can sell them on a secondary market, so yes, you'll see the "mark to market" value. And indeed, that is the only way you can "withdraw early" at the brokerage.

At a bank you have an option of early withdrawal from the CD, sacrificing hopefully only a meager amount of your earned interest, so it's not really an issue.

 

[OldShooter]

A more basic observation: If there is significant probability of an early withdrawal, a CD is probably not a good choice in the first place. I buy T-bills; I have never needed to sell one, but they are much more liquid than bank CDs hence there should be less of a haircut if I sell before maturity.

 

[limeyx]

Just found out tonight that Schwab sells other companies CD's through their website. They hold the paper, all institutions are FDIC insured. Got a 13 month CD from Wells Fargo at 2% (can't get anything close to this on Wells website). At the end of the term the proceeds are put back into your Schwab account along with the interest. Very Convenient, and competitive.

Thanks, this is awesome as it looks like the rates are even higher than Ally Bank and this will let me keep more of my money in one place!

I do like the Ally 11 month no-penalty still but once my current regular CDs mature over there, I'm going to move them over to Schwab!

 

[limeyx]

Yeah a concern for me too.





Thanks.

The ones I just browsed on Schwab seem to be callable on death only (but I only looked at 3 or 4)

 

[OldShooter]

... I'm going to move them over to Schwab!

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.

 

[dunkelblau]

Just found out tonight that Schwab sells other companies CD's through their website. They hold the paper, all institutions are FDIC insured. Got a 13 month CD from Wells Fargo at 2% (can't get anything close to this on Wells website). At the end of the term the proceeds are put back into your Schwab account along with the interest. Very Convenient, and competitive.

From the FDIC (five years ago): https://www.fdic.gov/consumers/consumer/news/cnspr13/cdsfrombrokers.html
Be skeptical if the interest rate on a brokered CD is significantly higher than other advertised rates... “If a broker is offering you a CD rate significantly higher than the general market rates, that broker is probably trying to lure you in to sell you another financial product that may not be FDIC-insured.”

This seems suspicious: your (949763PA8) Wells Fargo NA 2.1% maturing 04/15/2019 on Schwab.com compared to standard fixed rate 12-month CD 0.15% (regardless of principal) listed on
https://www.wellsfargo.com/savings-cds/certificate-of-deposit/

So is the CD offered by Schwab a certificate of deposit -- or maybe collateralized debt of some kind?

 

[OldShooter]

From the FDIC (five years ago): https://www.fdic.gov/consumers/consumer/news/cnspr13/cdsfrombrokers.html
Be skeptical if the interest rate on a brokered CD is significantly higher than other advertised rates... “If a broker is offering you a CD rate significantly higher than the general market rates, that broker is probably trying to lure you in to sell you another financial product that may not be FDIC-insured.”

This seems suspicious: your (949763PA8) Wells Fargo NA 2.1% maturing 04/15/2019 on Schwab.com compared to standard fixed rate 12-month CD 0.15% (regardless of principal) listed on
https://www.wellsfargo.com/savings-cds/certificate-of-deposit/

So is the CD offered by Schwab a certificate of deposit -- or maybe collateralized debt of some kind?

I am not much for paranoia, conspiracy theories, or tinfoil hats. The Schwab bond desk telephone number is 800-626-4600. Call them tomorrow. I'd sure they will calm your fears and answer any questions.

 

[Chuckanut]

From the FDIC (five years ago): https://www.fdic.gov/consumers/consumer/news/cnspr13/cdsfrombrokers.html
Be skeptical if the interest rate on a brokered CD is significantly higher than other advertised rates... “If a broker is offering you a CD rate significantly higher than the general market rates, that broker is probably trying to lure you in to sell you another financial product that may not be FDIC-insured.”

This seems suspicious: your (949763PA8) Wells Fargo NA 2.1% maturing 04/15/2019 on Schwab.com compared to standard fixed rate 12-month CD 0.15% (regardless of principal) listed on
https://www.wellsfargo.com/savings-cds/certificate-of-deposit/

So is the CD offered by Schwab a certificate of deposit -- or maybe collateralized debt of some kind?

FWIW, when I bought a few CDs from Schwab nobody tried to sell me anything else. In fact, even when I have talked to them in their office, there is no pressure, though they do let me know about their Robo Investing service and their relatively cheap advising service (.28%) which the rep told me is 'for those who feel they need and advisor".

That said, it's always wise to question a much higher than normal return. In this case the Schwab WF CD rate is about the same as banks such as Ally and Capital One. WF's advertised rate at the bank branches is suspect to me as it makes me think they want to take me for a complete idiot.

I bank with BofA and when I checked their rate for a 1 Year CD I just about gagged it was so small. Schwab will continue to get my business.

 

[dunkelblau]

OldShooter, Chuckanut, thanks, I've been a loyal Schwab customer for 30 years and never had any problem, this is just my way of due diligence for something that seems like an incredibly good deal. I'm still curious about why this large yield discrepancy exists.

One explanation I read this morning suggested product moved through brokerages responds much more quickly to changing market expectations than bricks and mortar offerings, so this might be a hedge against an abrupt large jump in interest rates? If so this maybe why I remember how the Schwab CD offers looked unappealing back when this was new over a decade ago. We were better off shopping laggards in a falling rate environment.

 

[njhowie]

From the FDIC (five years ago): https://www.fdic.gov/consumers/consumer/news/cnspr13/cdsfrombrokers.html
Be skeptical if the interest rate on a brokered CD is significantly higher than other advertised rates... “If a broker is offering you a CD rate significantly higher than the general market rates, that broker is probably trying to lure you in to sell you another financial product that may not be FDIC-insured.”

All CDs sold on Fidelity, Schwab, and Etrade websites are FDIC insured unless specifically indicated that they do not carry FDIC insurance. I saw one or two on Etrade over the past year that were not FDIC insured, but that is out of thousands and thousands.

This seems suspicious: your (949763PA8) Wells Fargo NA 2.1% maturing 04/15/2019 on Schwab.com compared to standard fixed rate 12-month CD 0.15% (regardless of principal) listed on
https://www.wellsfargo.com/savings-cds/certificate-of-deposit/

So is the CD offered by Schwab a certificate of deposit -- or maybe collateralized debt of some kind?

You are clearly unfamiliar with how these work. The Wells 2.1% 13-month CD on the Schwab site is not suspicous at all. Fidelity is also offering it at this time. All March 2019 new issues are currently going for 1.85%-2.05%. Wells is always offering 13-months at a yield 0.1% above what everyone else is offering 12-month at. They've been doing this for a long time.

Please review this yield table at Fidelity and note the top line for CDs. The Wells Fargo 2.1% CD is normal, the CDs offered on the Wells site are abnormally low.

https://fixedincome.fidelity.com/ftgw/fi/FILanding

Ask yourself, who would take a 12-month 0.15% CD when online FDIC insured savings accounts are yielding 1.5% to 1.8%?

 

[dunkelblau]

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.

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.

 

[Chuckanut]

Ask yourself, who would take a 12-month 0.15% CD when online FDIC insured savings accounts are yielding 1.5% to 1.8%?

I have. And the only answer I can come up with is that they are either ignorant of current interest rates, or they are very nice people who want to subsidize the higher rate we are getting.

 

[njhowie]

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.

 

[njhowie]

I have. And the only answer I can come up with is that they are either ignorant of current interest rates, or they are very nice people who want to subsidize the higher rate we are getting.

Exactly correct.

 

[GravitySucks]

Dunkelblau,
That 2.1 Wells CD NJhowie linked to is a new issue, not a brokered cd. Plenty of mega banks listed under there like Mellon and Goldman.
I used brokered CDs for part of my bond ladder as the yield was higher. Not sure why the yield was a little higher as they're all FDIC insured.

 

[njhowie]

Dunkelblau,
That 2.1 Wells CD NJhowie linked to is a new issue, not a brokered cd. Plenty of mega banks listed under there like Mellon and Goldman.
I used brokered CDs for part of my bond ladder as the yield was higher. Not sure why the yield was a little higher as they're all FDIC insured.

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.

 

[jazz4cash]

I have. And the only answer I can come up with is that they are either ignorant of current interest rates, or they are very nice people who want to subsidize the higher rate we are getting.

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?