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Review Your Financial Plan for Success in 2022
March 31, 2022Why Brokered CDs Are Better Than High-Yield Bank CDs
Unlike bank certificates of deposit (CDs), brokered CDs can offer you an effective way to earn higher-than-average interest while having access to liquidity through a secondary market. These CDs can give you the best of both worlds — a locked-in interest rate and the ability to liquidate without paying a fee to the issuing bank. With the help of an experienced investment management solution, you can maximize your ROI from the CD asset class with brokered CDs. Read on to learn more about how brokered CDs outcompete regular bank CDs!
Brokered CDs Vs. Bank CDs
Brokered CDs differ from regular bank CDs in the following ways:- They offer higher interest rates, often 100 to 200 basis points higher than regular CDs.
- Investors may buy and sell them on a secondary market.
- Brokers can offer access to CDs from a variety of banks, not just the retail CDs offered by one institution.
- Investors can choose the exact combination of CDs to suit their investment horizons.
Maximizing ROI: Why Brokered CDs Earn More Interest than Bank CDs
Brokered CDs offer higher interest rates than regular CDs because the issuing bank passes off certain responsibilities, such as customer service, to the broker. This allows you to earn a higher rate since the bank has a lower cost of servicing the CD. Brokers also tend to purchase CDs in bulk, and banks offer a higher rate as an incentive for these large purchases. For example, consider a large broker and asset manager with clients who have a high demand for CD products, given an increase in prevailing interest rates. The broker may reach out to several banking institutions to purchase CDs in bulk to resell. The banks will enter into this deal due to the ability to rapidly raise affordable funds. In return, the bank will offer a competitive coupon rate to compete against similar products, such as U.S. treasury securities. The broker’s clients can then enjoy access to these CDs at higher rates. All three parties benefit from this approach:
- The bank can raise the funds it needs at a lower cost of capital.
- The broker can offer a valuable product to its clients.
- You, the investor, can earn a higher interest rate on your CD than you otherwise would from a regular bank CD.
We Help Our Clients Gain Access to the Brokered CD Market
Investors trade brokered CDs via bond-like markets. These products have all the same qualities as bonds, including a secondary market, a market-driven price, yield to worst (YTW), yield to maturity (YTM), and, in some cases, callability. At WMSUS, we can provide you with access to this competitive brokered CD market and help you earn higher interest than with a regular high-yield bank CD.
How Brokered CDs Work
Brokered CDs have the following attributes:- Coupon: The bank will pay this interest rate to you, the CD holder, at specified intervals called the “coupon frequency.”
- Coupon Frequency: This specifies how frequently the bank will make coupon payments. Usually, the bank will pay you monthly, quarterly, or semi-annually. For longer maturities, the bank may pay interest annually.
- Maturity: This is the date when the CD will mature, and you will receive back your principal. If you purchased the brokered CD at a price less than $100, you might earn a profit from the difference in the lower price paid and the regular principal repayment.
- Callable: If a brokered CD is callable, then the issuing bank will have the ability to terminate the CD prematurely. If this happens, you will receive the full principal payment plus any interest you earned up to the call date.
- Price: The current market price of the CD on the secondary market. This price depends on the demand for CDs by investors and the macroeconomic interest rate environment.
- Quantity, Minimum, and Maximum: Depending on your broker, you may find that you can purchase fractional CDs. If not, you may need to purchase a specific quantity defined by the minimum and maximum set by the issuer or broker.
- APY / Yield to Maturity (YTM): This rate represents the total rate of return you would earn if you held the CD to maturity.
- Yield to Worst (YTW): The YTW of a brokered CD shows the anticipated yield an investor would earn if the issuer chooses to call. This calculation incorporates the full principal repayment along with any interest accrued up to the call date.
- You know that the issuer is JP Morgan, the largest bank in the United States.
- The coupon or interest rate is 4.5%. JP Morgan may pay this coupon monthly, quarterly, or semi-annually.
- The maturity of this CD is January 1, 2024. At the time of maturation, you will receive the principal of the CD back.
- JP Morgan has the right to call this CD at its discretion.
How You Can Exit Your Brokered CD with the Secondary Market
With a regular bank CD, your money stays locked up until the maturity date. If you wish to liquidate your CD, you must pay an early termination fee to the bank you bought it from. A brokered CD has no such restrictions. Instead, you may sell your brokered CD prior to the maturity date on the secondary market. The secondary market acts as a source of liquidity for buyers and sellers of brokered CDs. Depending on the movement of interest rates, you may find that your CD has gained or lost value. Consider the following two types of interest rate shock scenarios:- Rising Rates: In rising interest rate environments, CDs tend to lose value since investors can purchase bonds and CDs, and even invest in high-yield savings accounts with a higher interest rate than the rate at which the CD was originally issued.
- Falling Rates: In falling interest rate environments, CDs may gain value since they may offer higher rates than newly-issued debt products available to investors. However, if the issuing bank can call the CD, they may choose to do so to refinance their debt.
How High Net Worth Individuals Can Protect Their Wealth with Brokered CDs
One major yet often understated advantage to purchasing brokered CDs revolves around the $250,000 FDIC deposit guarantee. If an affluent investor purchases CDs from several different issuing banks via their broker, they can ensure that their money receives FDIC deposit insurance across each bank up to $250,000. For instance, investors could purchase $250,000 of CDs across four different banks. This would give them a total of $1 million in combined FDIC coverage. This approach offers a more simplistic way to gain FDIC protection without the difficult task of opening individual bank accounts. For investors with sufficient assets, brokered CDs can act as a type of savings vehicle with all the benefits of FDIC protection.
Choosing Which CD Length Makes Sense for Your Financial Situation
CDs come in different lengths. Choosing the right maturity for your situation depends on your saving goals. For example, if you plan to use your funds one year from today, you will want to purchase a CD with a maturity date of one year from now. If you have longer-term goals, you may find that it makes sense to use what’s known as a CD ladder to effectively bridge the gap between now and the time you need your money. WMSUS can help you determine the combination of brokered CDs and other investment products that can help you meet your financial goals.WMSUS Brokered CDs
At WMSUS, we can help you find the best brokered CDs for your financial situation. We have access to the entire brokered CD market and can assist you in choosing the right CDs for your investment goals. We can offer better service than your bank because we only make money when you do, too.
