What financial pros say about certificates of deposit for wealthier clients.
CDs have become increasingly popular since the Fed started raising rates in March 2022, with CD balances increasing $400 billion from $36.5 billion in April 2022 to $418.4 billion in January 2023, according to data from the Federal Reserve.
And no wonder: Plenty of CDs are offering APYs of around 5% right now . With that in mind, we chatted with Carl Ludwigson, a managing director of Bel Air Investment Advisors, an investment firm that oversees and manages a reported $9.5 billion in assets. Ludwigson has been responsible for portfolio construction and client service for high-net-worth families, foundations and endowments for the last 10 years, and previously held positions at Credit Suisse and Merrill Lynch, among other financial firms. One thing he isn’t telling his wealthy clients to do right now: invest in CDs. “We do not allocate to CDs, but we see other opportunities to take advantage of high short-term interest rates through Treasury bills and short-term municipal bonds,” he says. He prefers bonds over CDs now in part for better tax perks: “Short term municipal bonds may be federal and state tax free, often presenting a better tax adjusted return,” says Ludwigson. Remember, interest income from CDs are taxed at your highest marginal federal income tax bracket and at the state level for most states. “Currently tax brackets range from 10% up to 37% and the higher the tax bracket, the less interest you keep,” says certified financial planner John Piershale at John Piershale Wealth Management. Ludwigson continues: “CDs may have a use case for certain individuals investing less than the FDIC-insured amount and willing to lock up capital for a period of time. Investors should note that CDs carry penalties for early withdrawal and while some CDs earn a slight illiquidity premium to short term treasuries, investors should consider that treasuries are state tax exempt and highly liquid.” Do other financial planners recommend CDs to their wealthy clients? As for whether financial planners tend to recommend CDs for their wealthy clients? It depends. Certified financial planner Blaine Thiederman says CDs are low-risk but they also offer low returns. “If you’re a high-net-worth individual, you’ve likely got a diversified portfolio already. According to the Federal Reserve, the average interest rate for a 1-year CD as of August 2023 is just 0.22% which is peanuts compared to what you could earn in equities or even some bonds,” says Thiederman. That said, Thiederman doesn’t recommend CDs if his clients seek growth. “The S&P 500 has had an average annual return of about 10% to 12% per year over the last 90 years and bonds have averaged over 5%,” says Thiederman. Bri Conn, investment adviser representative at Childfree Wealth, says although CDs can be a helpful tool for individuals with a large sum of money they plan on using for a specific purpose in the future, they’re not always the best option. “The downfall of a CD is you must be able to manage without using the money until it reaches maturity and given the current high-yield savings account interest rates, I would not recommend a CD to most clients, wealthy or not,” says Conn. In cases when safety of principal is of most concern, Piershale says wealthy people can benefit from buying CDs, particularly inside of an IRA. “It can be advantageous for wealthy clients to buy CDs in certain scenarios, like inside an IRA. Since IRAs are tax-favored accounts, it can defer taxes on the CD until a client takes distributions, or generate tax free income in the case of a qualified distribution from a Roth IRA,” says Piershale.
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