‘Brokered CDs’ Offer Interest Rates Well Above Regular CDs
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What are brokered CDs and how do they differ from regular bank CDs?
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Certificates of deposit, or CDs, have seen their popularity decline since the Federal Reserve lowered interest rates coming out of the 2007-2008 recession. And even as the Fed has been raising interest rates all year, the return on bank-issued CDs is still only about 2%. But how does a 4% return sound? Or 6%? That's the going rate on some CDs you can get, not through a bank, but through a brokerage. So how do you go about getting one? And are there any strings attached? I'm J.R. Whelan from The Wall Street Journal, and joining me is WSJ reporter Rachel Louise Enzine. Rachel, thank you very much for being with us.
Thanks so much for having me.
So, Rachel, why would someone buy a standard certificate of deposit?
So a standard certificate of deposit has long been a popular place to stash money that's seen as pretty low risk because as long as you're under the FDIC deposit insurance limits, your money is considered safe and you are set to earn a certain amount of interest over time. So you put $1,000 in and the bank says, hey, we will give you 2% for your $1,000 for a year.
So why are we now seeing CDs offered through brokerages rather than straight from banks?
So basically, the big picture is that CDs have really fallen out of favor because interest rates have been so low. So, you know, back many decades ago, they were an extremely popular product. A huge share of bank deposits were tied up in CDs of all kinds. And just with the over a decade of very low rates, Basically, these have fallen out of favor and are now starting to become a little bit more popular as the Federal Reserve starts to raise rates. So basically, what we're seeing is banks are increasing rates selectively. So they are increasing rates on what we think of as the traditional CDs, like you go to the bank website and look for a CD. But where they are giving the best rates are on these products called brokered CDs where you don't buy them directly through the bank.
The bank sells them through brokerage firms like Fidelity or Schwab or TD Ameritrade.
So why are banks offering higher interest rates on the CDs through brokerages rather than from the bank itself?
I did speak to a consultant who works with the banks on setting their deposit pricing. And he basically said, hey, these banks are seeing money from their wealthiest customers be more rate sensitive, meaning these folks have already started to move their money for a higher rate. And they're trying to hang on to the deposits of wealthier people, which they can get through these brokerage firms.
Yeah, but it's not just wealthier people who are rate sensitive. You know, for anyone trying to get some return on their cash, it's been hard to find attractive rates, right?
Broadly, banks have been very reluctant to increase interest rates on deposits of all kinds. And on one end of the spectrum, you kind of have the traditional savings account, which at many banks is still really yielding almost nothing. But on the other end of the spectrum... you have these brokered CDs where the banks are finally starting to pay up in pretty significant amounts. So if you're looking for yield, you're probably not going to get it at a traditional bank on your savings account. In most cases, where you are going to get it is if you go into your brokerage account and look and see if that same bank is offering a brokered CD.
So Rachel, can you bottom line this for us? What would the difference in the interest rate on brokered CDs mean for someone's return on their investment?
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