What Is a Brokered CD?
A brokered certificate of deposit (CD) is sold through a broker or brokerage firm. This type of CD is still issued by a bank, but a brokerage buys the CDs in bulk to negotiate a higher rate. The brokerage then charges the purchaser a fee in addition to the principal amount deposited into the CD.
Brokered CDs vs. Bank CDs
Some consumers opt for brokered CDs over traditional bank CDs due to the higher yield that’s typically offered by brokered CDs. However, brokered CDs do carry slightly more risk. If you need to access the funds in the CD before its maturity date, you’ll have to sell it in the secondary market — and you could end up getting less than what you paid for it if rates have risen since it was purchased.
| Feature | Brokered CDs | Bank CDs |
|---|---|---|
| Interest Rates | Higher APY than bank CDs but with simple interest | Lower APY than brokered CDs but with compounding interest |
| Common Fees | Intermediary fee to purchase CD | Early withdrawal fee to take money out before maturity |
| Diversification | Can select a variety of CDs from different banks within one | Must open different accounts for each CD or bank purchased from |
| Early withdrawals | To access funds early, the holder must sell the CD on the secondary market | To access funds early, the holder must pay an early withdrawal penalty |
| Deposit insurance | Most are FDIC insured; make sure that the brokered CD is a bank product and not a security | FDIC insured up to $250,000 per depositor, per FDIC-backed bank |
To summarize, the key benefits of a brokered CD are potentially higher interest rates, the ability to purchase a variety of CDs at once and that there are usually no early withdrawal penalties. The drawbacks to owning brokered CDs include the intermediary fee required to purchase, no compounding interest and the potential for losing money on the secondary market.
How Do Brokered CDs Work?
You can think of brokered CDs as investment products rather than deposit products like bank CDs. The brokerage that purchases the CDs shops around for the best interest rates and purchases the CDs in bulk, passing on the higher interest rates to the consumer.
Brokered CDs tend to have a longer term than offered by bank CDs, but this doesn’t mean your money is locked away for longer. You can sell your brokered CD on the secondary market if you need access to the funds before the CD matures, but you’ll be subject to the current interest rates and prices.
The downside of this is that you do stand to lose some of your money if interest rates have risen since you purchased the brokered CD. In a rising interest environment, demand for brokered CDs on the secondary market falls, so you may end up selling your CD for less than you paid.
The ability to sell your brokered CD on the secondary market means you can also purchase one from the secondary market. You can sometimes get great deals on secondary market brokered CDs, because brokers will offer them at a discount since they are not new issues.
Owning brokered CDs can also help spread your deposits out over multiple banks to take full advantage of FDIC insurance coverage. Since the FDIC limits coverage to $250,000 per depositor per bank, investors with larger sums to deposit can purchase CDs at different banks to ensure full federal deposit insurance coverage. With brokered CDs, you can hold deposits at many banks within one brokerage account.
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Are Brokered CDs Safe?
FDIC insures most brokered certificates of deposit up to $250,000, making them a relatively safe place to invest your money. Because CDs are a deposit product, you don’t risk losing your money if the market goes bad. And, if you intend to hold your brokered CD until maturity, you won’t have to worry about selling it on the secondary market for a potential loss.
Because brokered CDs are purchased through an intermediary rather than directly from a bank, it’s important to choose a trustworthy brokerage. The FDIC has some recommendations on what to look out for when purchasing a brokered CD.
- Disreputable Brokers
- When you purchase a brokered CD, you’re using a third party to establish a bank account for you, so you should always make sure that third party is who they say they are. Check your deposit broker’s credentials and verify their background with an authoritative source such as FINRA or your state’s consumer protection office.
- Suspiciously High Interest Rates
- An unscrupulous broker might advertise an unusually high interest rate on a CD just to rope customers in, only to sell them products that aren’t in their best interest. Research market rates on CDs and be skeptical of any brokered CD offering a significantly above-market interest rate.
- Uninsured Deposits
- Make sure your deposit account is properly titled and placed at an FDIC-insured bank. Confirm with your broker that the deposit accounts for its CDs are titled to indicate the broker’s role as an agent for its clients. This ensures that each client’s CDs are fully insured up to the $250,000 limit.
Red Flags When Purchasing Brokered CDs
How Do You Buy Brokered CDs?
You can purchase CDs from a brokerage in two ways: as a new issue or from the secondary market. Setting up a call or meeting with a broker can help you determine which CD product is best for you and your financial wellness plan.
When you talk to the broker about the CD you’re interested in purchasing, there are a few good questions you can ask to make sure it’s the right product for you:
Questions To Ask a CD Broker
- Is this brokered CD considered a bank product or a security?
- What is the name of the bank that’s issuing this CD?
- Is the issuing bank insured by the FDIC?
As with the purchase of any type of CD, you’ll receive a disclosure statement with details on the interest rate, how often the interest will be paid and the maturity date associated with your deposit.
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