Given the evolving market environment, investors are looking at low-risk investments in U.S Treasuries and Certificates of Deposit (CDs). Many people make these purchases on their own or through their bank because it seems to be the easiest and most comfortable way to see a decent return on their money. But putting in some time and effort with a financial planner will deepen your understanding (and your return*) on how to make your money work best for you.
Like gears in a machine, a brokerage account can hold more options than just stocks. Depending on your needs, the portfolio may contain low-risk fixed-income securities alone. One advantage of having a fiduciary advisor manage all your assets is that you can see your whole investment picture, rather than a scattering of separately-managed bonds, T-bills, and CDs -and all the accompanying paperwork and passwords to self-manage them.
CERTIFIED FINANCIAL PLANNERTM professional, Hamp Manning, offers 4 reasons why holding fixed-income securities like CDs in a brokerage account best satisfies our clients’ goals.
Brokered CDs offer several benefits to investors over CDs which are purchased through traditional brick-and-mortar banks. First, the similarities:
- Brokered CDs are FDIC insured (up to applicable limits)
- Redeemed at par at maturity
- Low risk (at least compared to stocks or bonds)
This is where the similarities end.
Key differences and advantages of brokered CDs:
- Liquidity: No early withdrawal penalty
- This is perhaps the biggest benefit. In contrast to a “normal” CD bought by a bank customer, CDs owned through brokerage accounts can be redeemed and sold prior to their maturity without being assessed early withdrawal penalties. A caveat, however, is that when they are sold the investor receives whatever the market is willing to pay for them at that time, which could be more or less than what the investor originally paid. Most brokered CDs are very safe investments which do not fluctuate significantly in value.
- Competitive rates
- Brokered CD rates are typically higher than rates offered by banks to their local market
- Convenience of access to a robust selection to choose from
- Many options to consider:
- Rates
- Maturity length
- Interest payment frequency (semiannually, quarterly, or monthly)
- Coupon structure (fixed, variable, or stepped)
- Bank credit quality
- Acknowledging that all banks are covered under FDIC insurance, different banks can fall anywhere along the spectrum of credit quality, which in part determines the yields that their CDs fetch on the market.
- On one end of the spectrum are the highest-credit quality banks, such as Goldman Sachs, Bank of America, JP Morgan, etc… and CDs offered by these banks typically have yields on the lower end.
- The middle ground are the smaller regional banks, while still very strong in credit quality, generally issue CDs with higher yields than the big banks.
- On the other end of the spectrum are the distressed or troubled banks. While still covered by FDIC, they might pose a higher risk of default (ex: Silicon Valley Bank, Signature Bank). CDs issued by these banks typically have the highest yields available, which is demanded by investors to compensate them for the higher risk. These are typically NOT suitable for the average investor.
- Acknowledging that all banks are covered under FDIC insurance, different banks can fall anywhere along the spectrum of credit quality, which in part determines the yields that their CDs fetch on the market.
- Many options to consider:
- Maximize FDIC coverage
- Owning CDs in a single brokerage account allows an investor to easily spread deposits out across multiple banks, each covered by its own FDIC limit, while traditional CDs limit the investor to a single limit at each different physical bank.
Our advisors work with clients to create a diversified portfolio of investments that meets your savings goals and current cash needs. We listen to your concerns on market volatility and help you plan for whatever wrench may be thrown in the gears.
Give us a call to begin our work together at 706-650-9900.
*According to study: https://www.financial-planning.com/news/smartasset-study-examines-financial-advisor-value
Certified Financial Planner Board of Standards, Inc. (CFP Board) owns the certification mark CERTIFIED FINANCIAL PLANNER™ in the United States, which it authorizes use of by individuals who successfully complete CFP Board’s initial and ongoing certification requirements.