SAN FRANCISCO — In need of an alternative to lackluster Treasury bond performance, financial advisers are helping a high-yield and low-profile cash product go mainstream.
SAN FRANCISCO — In need of an alternative to lackluster Treasury bond performance, financial advisers are helping a high-yield and low-profile cash product go mainstream.
Assets in brokered deposits — certificates of deposit sold by banks to deposit brokers who in turn distribute them nationally — soared to more than $520 billion last year, from $482 billion a year earlier and $58 billion of total assets at the end of 1996, according to the Federal Deposit Insurance Corp.
Unlike with conventional CDs, banks don’t charge an early-withdrawal fee, and they tend to pay a significantly higher yield. There is a risk, however, that brokered deposits could command less value upon sale if they aren’t held to term.
Like CDs, the FDIC insures brokered deposits up to $250,000 for individual retirement accounts and $100,000 for non-retirement assets.
Advisers pay attention
Their growth largely is thanks to financial advisers, who recognize their value as a means of stowing cash or as a substitute for Treasuries in a bond portfolio, according to advisers and deposit brokers.
The high yield for relatively low risk has advisers snapping them up in place of CDs.
“After 9/11, people said: ‘I don’t want to be at the whim of the market,’” said Gary Sullivan, trader for Bergen Capital Inc. The Hasbrouck Heights, N.J.-based firm is a division of Scott & Stringfellow Inc., a Richmond, Va.-based broker-dealer subsidiary of BB&T Corp., a Winston- Salem, N.C., regional bank.
“With the investment yield on brokered deposits, people get more in six months [for yield] than with a 10-year bond,” Mr. Sullivan added.
A 10-year Treasury note pays about 4.55%, versus a brokered deposit for six months at 5.15%, he said.
But brokered deposits also compare favorably with bank CDs, said Bradley Van Vechten, a Tiburon, Calif.-based registered representative affiliated with Linsco/Private Ledger Corp. of Boston and San Diego. “They are really way higher — [one-half to 1 percentage point] higher” in yield than what banks pay locally for CDs but without any greater risk, he said. “We shop them against local banks, and they win every time,” said Mr. Van Vechten, who declined to disclose his level of assets under management.
“[Brokered deposits] haven’t lost yet [to CDs].”
For instance, Mr. Van Vechten just made a big purchase of brokered deposits this month through Linsco for a client who is retiring in November. The amount he allocated to the brokered deposits is equivalent to the amount on which his client needs to live for the first year of retirement.
But Bergen Capital’s advisers use brokered deposits primarily with new accounts, Mr. Sullivan said.
“We use them as an asset-
gathering tool,” he said. “We like handling new accounts with safe secure money. The CD is the best way to develop trust.”
Despite raves from many financial advisers, getting the word out on brokered deposits remains a challenge, according to Chris Dobson, head of fixed income for Finance 500 Inc., a deposit brokerage firm in Irvine, Calif. “A lot of people don’t know you can buy a CD through a brokerage account,” said Mr. Dobson, whose firm has underwritten $13 billion in brokered deposits.
But more banks are catching on, because they need to maintain a certain ratio of deposits to loans to satisfy regulators.
The key is that they avoid having to gather deposits by traditional means: by opening checking accounts with more branches, raising the rates they pay on CDs locally or spending more on advertising, according to Chris Lewis, vice president and director of trading for Primary Financial LLC in Columbus, Ind., which brokers deposits between credit unions and banks.
Because they cut out these overhead and marketing costs, and get faster results in the bargain, banks find it economical to pay the higher rates that make them popular with investors.
Banks also are willing to pay better yields through national markets, because in many cases, they already have placed the loan, so they know they are getting the spread they need, Mr. Sullivan said.
“They’re used with a purpose in mind,” he said.
Yet the market never took off until greater use of them by more banks lent them an air of legitimacy, Mr. Lewis said.
“It’s been around a long time,” he said. “Before, there was a big stigma” dating back to the savings-and-loan scandals of the late 1980s. “Banks thought regulators wouldn’t accept [brokered deposits as a legitimate loan reserve],” Mr. Lewis said.
