Know the Risks Before Buying Brokered CDs

If you have a lot of money to invest in CDs, you might consider having a broker invest for you.

But brokered CDs come with risks, and it's critical that you understand the difference between a brokered CD and a certificate of deposit you purchase yourself. After weighing your options, you might decide you're better off shopping for the best banks and best CD rates on your own.

Paying a Broker to Find Best CD Rates: Three Advantages

1. Often, a broker can negotiate a higher interest rate by agreeing to invest a huge sum in a bank. Then the broker splits up the CD and sells pieces to consumers like you, so you benefit from the higher rate even though you don't have the huge amount of cash required to get it.

2. A brokered CD program offers convenience, particularly if you have a large sum to invest. Services vary, but a good brokerage firm will keep track of your deposits and provide one 1099 at the end of the year. The firm will notify you when CDs are getting close to their maturity dates so you can decide the best ways to reinvest. And a good broker will make sure your CD portfolio is invested in stable banks and your deposits are within the insurable limits of FDIC coverage.

3. You still maintain control, choosing terms of one month to several years or more for your CD investments and the denomination amounts for CDs.

Just like with CDs you purchase yourself, with brokered CDs you agree to deposit the money in a bank for a certain amount of time, and the bank agrees to pay a certain amount of interest. But there are some significant differences.

Certificate of Deposit through a Broker: Four Risks and Considerations

1. The convenience of brokered CDs isn't free. You'll pay fees for the broker's services. Make sure you understand how the fees are calculated, how much they will cost, and whether they could wipe out any additional interest earnings you would gain using the broker.

2. You incur market risk. With CDs you buy yourself, you forfeit some of your interest earnings as a penalty if you withdraw the money before the maturity date. But if you own just a part of a brokered CD, which is often the case, your share of the CD must be sold on the secondary market for you to get the money. If interest rates rise, buyers probably won't want to pay the full value of the CD, and you'll lose money.

3. You could also lose all your money if your broker invests in CDs with institutions that are not FDIC-insured or does not check to make sure all your deposits at a particular institution are within insurable limits for FDIC protection.

4. You sacrifice liquidity. Even if the institutions issuing the CDs are FDIC-insured and your deposits are within insurable limits, you'll face more hassles getting your money back if those banks fail than if you bought the CDs from the issuers yourself. Why? With brokered CDs, the brokerage has the direct relationship with the bank. You still will get your money back, but more red tape may be involved.

Highest CD Rates? Investigate Thoroughly

Deposit brokers don't have to be licensed, so anyone can claim to be a CD broker. The U.S. Securities and Exchange Commission recommends you thoroughly check the background of any brokers or companies you're considering. Follow these tips:

• Find out where the CD broker is considering depositing your money, and make sure those institutions are stable and FDIC-insured.

• Confirm that your deposits are within the current $250,000 per bank limit.

• Understand the terms of the CDs. A growing number of elderly customers have complained to the SEC about investing in what they thought were short-term CDs through brokers, only to learn later their money was locked up for 20 years.

If you decide you're better off investing in CDs on your own, shop for best CD rates online. You can find best bank rates for one-month CDs to seven-year CDs.


Sandra BlockDon't get burned by tricky brokered CDs • Don't get burned by tricky brokered CDs • Oct 31, 2000 • http://www.usatoday.comhttp://www.usatoday.com/money/perfi/columnist/block/0033.htm
Richard Burnett • Are Brokered CDs too Good to be True? Look Closer • Jun 30, 2009 • http://rismedia.comhttp://rismedia.com/2009-06-29/are-brokered-cds-too-good-to-be-true-look-closer/
Securities and Exchange Commission • High-Yield CDs ? Protect Your Money by Checking the Fine Print • Dec 03, 2008 • http://www.sec.govhttp://www.sec.gov/investor/pubs/certific.htm
Dan Burrows • Brokered CDs Pose Risks, Rewards • Aug 25, 2008 • http://www.smartmoney.comhttp://www.smartmoney.com/investing/economy/brokered-cds-pose-risks-rewards-23742/

How To Use CD Laddering to Maximize the Benefits of Your CD Investments

Climbing a CD Ladder to Wealth

Certificates of deposit are a great investment alternative if you already have as much money in the stock market as you feel comfortable with, or you have a short time window for investing. And, unlike the volatile stock market, CDs are safe, simple to understand, and provide guaranteed returns.

The downside of a CD is that you can't get access to your money until the maturity date without paying a penalty and forfeiting a chunk of the interest income. One way to sidestep that disadvantage is by CD laddering.

Better Savings Rates with CD Laddering

With CD laddering, you buy multiple CDs, all at once, with different maturity dates. Each CD represents one rung of the ladder. When a CD matures, you reinvest in another CD, representing yet another rung of the ladder.

For example, say you have $5,000 to invest. With CD laddering, rather than putting all the money in one CD, you could invest in a handful of CDs, making sure that all of them mature at different times. For instance, you could invest $1,000 each in 3-month, 6-month, 9-month, 1-year, and 18-month CDs. That would give you access to cash every quarter of the next 1 1/2 years when each of the CDs matures.

Certificate of Deposit Cash Flow

You can structure the CD laddering to provide the cash-flow you need. With CDs maturing at different times, you have more-frequent access to your cash, without e penalty of early withdrawal, than you would if you invested all your money in a single certificate of deposit.

Flexibility with CD Investments

When each CD matures, you can decide the best investment strategy. You might want to lock in a long-term CD if interest rates are high, or go with a short-term CD if interest rates are low. You can find CDs with terms as short as one month or as long as seven years. You can also structure the ladder to provide cash flow to fit your situation. If you think you'd need access to cash only once a year, then structure the ladder to feature yearly maturity dates. With the $5,000, for instance, you could invest in one-year, two-year, three-year, four-year and five-year CDs.

Longer-term CDs usually offer better interest rates than shorter-term CDs. With CD laddering, you can get the benefit of higher rates with longer-term CDs, but still get the cash-flow benefits because the maturity dates are staggered.

Monitor the CDs to decide how to reinvest them, or let your banker automatically renew the CDs for a portfolio requiring little maintenance.

Shop for Best CD Rates

You don't have to buy all the CDs from one bank. Shop around for the best CD rates for each type of CD. One bank might offer the best rates on one-year CDs while another bank offers the best rates on five-year CDs. Check your local banks, but shop online to compare and find the highest CD interest rates.

When you purchase CDs, make sure you understand all the terms and features, such as whether the interest rate is fixed or variable and whether the bank can "call" the CD--terminate the CD and return your principal and interest earned to date before its maturity.

Stay Under FDIC Limits

CDs are safe because they are insured by the FDIC, unlike investments like stocks and mutual funds. Just make sure your deposits at any one financial institutions are under the FDIC insurance cap, which now is $250,000 per institution, or invest in CDRS (pronounced "cedars") which allow you to be FDIC-insured up to $50 million.


Joan Goldwasser • What You Need to Know About CDs • Jun 01, 2009 • http://www.kiplinger.comhttp://www.kiplinger.com/magazine/archives/2009/06/what-you-need-to-know-about-cds.html

Eric Petroff • Step Up Your Income with a CD Ladder • http://www.investopedia.comhttp://www.investopedia.com/articles/bonds/07/ladders.asp?viewed=1

10 Steps to Improve Your Savings

Saving money is like exercising. Done right, it adds muscle to your finances. Left undone, your financial health turns weak and vulnerable.

Your savings should fall into three categories--long-term savings, such as retirement, short-term savings for items like home repairs and car down payments, and emergency savings in case you lose your job or face a major unexpected expense.

Here are 10 steps for a savings workout:

1. Set financial goals and put them in writing. You're more likely to stick to a savings plan if you know where you're headed. Set short-term, mid-range and long-term goals. Figure out how much you need to save each month to meet those goals.

Boost Your Savings Rate

2. Track your expenses for a month, and fill the money holes. You may know how much you pay for utilities, mortgage and groceries, but you probably don't know where your pocket money is going. Write down everything you spend and see where you can cut back. Making your own coffee at home on weekdays instead of forking over $4 for lattes before work, for instance, can save more than $1,000 a year.

3. Create a written spending plan and stick to it. Without a plan it's easy for little impulse purchases to add up and sabotage your good intentions to save. Make sure, of course, that your income is sufficient to support your spending plan and your savings goals. If not, look for ways to cut back on expenses or increase your income.

Emergency Money Market or Savings Account

4. Set up an easily accessible savings account or money market account for emergency savings. The traditional rule of thumb is to have three to six months of living expenses saved in case you lose your job, but given what's been learned lately, many experts now advise boosting that fund to nine months or more for living expenses. Shop around to make sure you get the best savings rates.

5. Pay yourself first. Have money automatically deducted each month from your checking account to a savings account. You're less likely to spend the money if it's not readily available.

Get Best CD Rates

6. Invest in certificates of deposit for short-term savings goals. CDs provide a higher rate of interest than high-yield savings accounts and are available in term lengths varying from one month to several years. Find the best CD rates to maximize your savings, and make sure you understand all the features of the CD before you hand over your money

7. Put your raises and bonuses to work. Instead of spending the extra income, use it to boost contributions to your IRA or 401(k).

8. Shop for bargains. Compare prices on everything you buy and choose the option with the greatest value for the dollar.

Make Interest on Small Change

9. Round up to the nearest dollar. See if your bank has a program to round up to the nearest dollar purchases you make with your check card and divert that money into your savings account. If your bank doesn't have this program, you can do it yourself by paying only with bills and saving the coins. Pocket change adds up to big dollars over time.

10. Save at least part of your tax refund next year. It's a painless way to build up your savings and you'll get far more satisfaction from achieving your financial priorities than from anything you would purchase with the money.

Getting in shape (physically or financially) can't be done overnight, but it can be done. You will probably find that you get more satisfaction watching your savings grow than you would from impulse spending on items soon forgotten.

National Endowment for Financial Education • Save For Your Future • Jan 01, 2009 • SmartAboutMoney: http://www.smartaboutmoney.org/Home/TaketheFirstStep/SaveForYourFuture/tabid/403/Default.aspx
National Endowment for Financial Education • Four Ways to Shape Up Your Money • NEFE: http://www.nefe.org/LinkClick.aspx?fileticket=Jy+U1HU9FjA=&tabid=70&mid=511

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Disclaimer:This content is not provided or commissioned by American Express. Opinions expressed here are author's alone, not those of American Express, and have not been reviewed, approved or otherwise endorsed by American Express. This site may be compensated through American Express Affiliate Program.

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