Brokered CDs - profit But if interest rates have risen...

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Brokered CDsMany brokerage firms known as "deposit brokers" offer CDs. These brokerage firms can sometimes negotiate a higher rate of interest for a CD by promising to bring a certain number of deposits to the institution. Unlike traditional bank CDs, brokered CDs are sometimes held by a group of unrelated investors. Instead of owning the entire CD, each investor owns a piece. If several investors own the CD, the deposit broker may not list each person's name in the title but the account records should reflect that the broker is merely acting as an agent (e.g., "XYZ Brokerage as Custodian for Customers"). This ensures that each portion of the CD qualifies for up to $100,000 of FDIC coverage. In some cases, the deposit broker may advertise that the CD does not have a prepayment penalty for early withdrawal. In those cases, the deposit broker will instead try to resell the CD if the investor wants to redeem it before maturity. If interest rates have fallen since the CD was purchased, and demand is high, he/she may be able to sell the CD for a
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Unformatted text preview: profit. But if interest rates have risen, there may be less demand for such lower-yielding CD, which means that he/she may have to sell the CD at a discount and lose some of the investor s original deposit. Deposit brokers do not have to go through any licensing or certification procedures, and no state or federal agency licenses, examines, or approves them. In the event of bank failure, FDIC insurance applies but may be more difficult to realize. Direct deposit CDs are often allowed to mature at the original rate by the acquiring bank, but brokered accounts usually stop paying interest immediately. Brokered depositors may not be timely notified. Further, the FDIC will pay claims on direct deposits within 7 10 days, brokered CD claims may take 30 60 days. Additionally, the FDIC may require that brokered depositors prove they do not hold simultaneous direct and brokered deposits which exceed FDIC limits....
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