When a Broker Offers a Bank CD: It Pays to Do Some Research
A certificate of deposit account (CD) at an FDIC-insured bank is one of the safest, most reliable investments available because it provides a predetermined fixed- or variable-rate interest computation for a set time period (usually three months to five years) and deposit insurance protection of up to at least $250,000 per depositor. Recently, you may have seen or received advertisements from deposit brokers offering FDIC-insured CDs. While using deposit brokers has grown in popularity because brokers often can negotiate higher interest rates, the CDs they sell may involve more risks than working directly with an insured bank.
FDIC Consumer News has previously cautioned readers to be careful when buying CDs from third parties, but given the increased consumer interest and ongoing reports of complaints, we offer our latest tips and information.
Use a reputable deposit broker. The FDIC does not have the authority to examine, approve or insure deposit brokers, who can be anyone from an individual transacting business alone from a home office to a major financial services firm. “Protect your money by using a broker you believe will recommend legitimate investments appropriate for your portfolio and will be available to answer questions and resolve problems,” cautioned Jan Templeman, an FDIC Consumer Affairs Specialist. “Your best bet may be a financial professional you already know and trust, such as a stockbroker or financial planner with whom you’ve had a reliable, long-term working relationship.”
If you’re thinking about an offer from an unfamiliar deposit broker, research that person’s credentials and experience. If the person claims to hold any professional licenses or certifications, verify his or her background and standing with the issuing agency, such as FINRA (the Financial Industry Regulatory Authority at www.finra.org or 1-301-590-6500). In addition, your local Better Business Bureau (http://www.bbb.org/) or your state’s consumer protection office (www.consumeraction.gov/state.shtml) may be able to provide information about whether an individual broker or a company has a history of actual or alleged misconduct.
“We’ve heard multiple examples of individuals wiring funds to someone claiming to be a reputable broker, only to later find that the broker disappeared with all of the money,” said Calvin W. Troup, an FDIC Senior Deposit Insurance Specialist. “Whenever you use a third party to establish a bank deposit account, you place your funds at risk if that person does not put your money in an FDIC-insured bank.”
Be skeptical if the interest rate on a brokered CD is significantly higher than other advertised rates. Some unscrupulous brokers advertise above-market rates on CDs solely as a ploy to get a consumer in the door. They then try to sell investment products that are not FDIC-insured and not in the consumer’s best interest.
In one recent case, a high-rate brokered CD was issued by a foreign bank and therefore not protected by FDIC deposit insurance. However, the marketing materials for the CD included multiple misleading references to an FDIC-insured bank, and that led consumers to mistakenly believe that the investment was subject to FDIC insurance. In reality, the role of the FDIC-insured bank was limited solely to wiring collected deposits overseas to the issuing bank.
Another example previously reported in FDIC Consumer News involved a deposit broker who offered an exceptionally high interest rate on a short-term CD by adding the broker’s own money to the interest rate paid by the issuing bank. Once that short-term CD matured, no similar high-rate CD offer was made, and instead the broker aggressively pitched a non-insured investment product that may have been a poor choice for the consumer but lucrative for the broker. Moreover, if the bank that issued the CD had failed during the term of the CD, deposit insurance would only cover the principal plus accrued interest at the bank’s stated interest rate, not the broker’s advertised rate.
“It is worthwhile to familiarize yourself with the current interest rates for both traditional and brokered CDs from FDIC-insured banks,” advised Templeman. “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.”
Make sure all of your deposit will be fully insured. To protect your brokered CD from loss if the bank fails, follow these steps to confirm that your money is placed in a properly titled deposit account at an FDIC-insured bank and that all of it is within the deposit insurance limits. First, get the name of the bank where your money is to be deposited and verify that it is FDIC-insured by calling the FDIC toll-free at 1-877-275-3342 or searching BankFind, the FDIC’s database of insured institutions at http://research.fdic.gov/bankfind.
Second, ask your broker to confirm that the deposit account records for its brokered CDs reflect the broker’s role as an agent for its clients (for instance, by titling the account “XYZ Brokerage, as Custodian for Clients”). That way, each client who owns the CD can qualify for up to at least $250,000 in deposit insurance. This coverage is generally referred to as “pass-through” insurance because it bypasses the broker and is calculated based on the ownership interests of the individual depositors.
Also with pass-through insurance, a consumer’s brokered deposits are added to any traditional deposits he or she has at the same bank for purposes of calculating coverage. So, if your combined brokered and traditional deposits at a single bank exceed $250,000, you should call the FDIC to discuss your coverage.
Learn whether your only option to withdraw early from a brokered CD is to sell it. Traditional CDs obtained directly from a bank often allow the depositor to pay a penalty to withdraw the money before the CD matures. However, brokered CDs, which typically have much longer maturities (up to 10 or 20 years), rarely have that kind of early withdrawal feature. For them, your only option for early withdrawal may be to have the broker sell your ownership interest to another investor at the prevailing market value. If CD interest rates have increased since you acquired your brokered CD, the value of your deposit may have declined, and you could have a loss of principal that would not be insured by the FDIC. But if interest rates have fallen since you purchased your CD, the value may have risen, and you may be able to sell the CD at a gain.
If you buy a CD directly from a bank and it fails, you will receive an insurance payment faster than you would if you purchased it through a broker. With brokered CDs, the FDIC must first obtain from the broker the name and deposit amount for each CD investor. Then the FDIC will send the deposit insurance check to the broker, who in turn is responsible for distributing the payment to the consumer, and that can result in further delays. Note that the FDIC does not supervise or become involved in the arrangements between brokers and consumers.
If you have a problem with a CD sold by an investment firm,you have a couple of options. To submit a complaint against a salesperson, contact FINRA. If your complaint is about a CD or another financial product sold by an investment firm, consult the U.S. Securities and Exchange Commission (www.sec.gov or 1-800-SEC-0330).