Try Brokered CDs for Higher Rates
By Mark P. Cussen on certificates of deposit
By Mark P. Cussen
First Interstate Bank
Thanks to the FDIC, millions of Americans are able to sleep peacefully at night, knowing that their savings are protected by government-backed insurance. Since the thirties, certificates of deposit have become synonymous with safety of principal. Bank customers who shop for CDs concern themselves only with the rates and terms that are available.
Unfortunately, the safety that comes with FDIC insurance comes with a price. Will Rogers once said, “It’s not the return on my money that concerns me, it’s the return of my money.” This famous saying exemplifies the attitude of many bank customers. While CDs are among the safest types of investments available, their rate of return is correspondingly low. If interest rates are around 5%, then that is about what you can expect a short term CD to pay. While longer term and jumbo CDs can pay slightly more, it is very difficult to see much real growth from them over time.
However, there is another option available for those seeking higher rates on their guaranteed investments. Unbeknownst to many CD buyers, many brokerage and investment firms offer CDs that are every bit as safe and secure as those found in banks. While these CDs do differ from their cousins in the banking system in some respects, they are still FDIC insured up to $100,000 per CD owner. Furthermore, this type of CD generally pays a higher rate than bank CDs, and they often contain other features, such as put or call options that allow either the buyer or the issuer to redeem the certificate prematurely without penalty. For example, a brokered CD with a 20-year maturity could be “puttable” at a premium, such as $105, after five years, if the buyer so desires. That means that five years from now, if rates have gone up and the buyer wishes to move the money in this CD to another one, then he or she will receive $1,050 in return for each thousand dollars that was originally invested. Therefore, a $100,000 CD holder will see a return of $105,000 on the principal-in addition to the five years of interest the holder received. Call features give the issuer the same privilege. Brokered CDs can also be bought and sold in the secondary market like any other type of bond. However, the FDIC guarantee will only apply for investors that either hold their certificates to maturity or redeem them in a put or call transaction. If the certificate is sold prematurely in the secondary market, then the owner may receive more or less than his original investment, depending on market conditions. But those who hold their CDs to maturity or call will be safe.