What Are Brokered CDs? Explanation, Pros & Cons
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Summary:
Brokered CDs are certificates of deposits opened through brokerage firms instead of banks. While brokerage CDs have many similarities to bank CDs, they tend to have higher interest rates and longer term lengths than the typical bank CD.
Certificates of deposit (CDs) are usually federally insured savings accounts with a set maturity date and fixed interest rate. Similar to a regular savings account, you deposit money in a CD and earn interest on that deposit over time, but you can only withdraw the total amount when the CD reaches the maturity date.
While you’re probably aware of the typical bank CD, you may not be aware that there are many other types of CDs you can purchase. Some of these deposits, such as brokered CDs, offer more competitive interest rates and term lengths. Let’s take a look at brokered CDs: what they are, how they differ from bank CDs, and which one may be a better choice for you.
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What are brokered CDs?
A brokered CD is a certificate of deposit that you purchase through a broker instead of a bank or credit union. A broker is a sort of middleman who oversees and facilitates transactions between buyers and sellers. In the case of certificates of deposit, brokers purchase CDs from banks and then sell them to customers.
A buyer may choose to purchase brokered CDs over traditional bank CDs to get better terms, liquidity, and potential benefits. For example, a brokered CD may have a longer term to maturity than a bank CD that will offer better returns at the maturity date.
Pro Tip
If you’re looking to buy a certificate of deposit, it’s a good idea to shop around for the best rates. You can use SuperMoney’s comparison tool to find the best CD rates on the market right now.
How do brokered CDs work?
To get a brokered CD, you first need to purchase the certificate of deposit through a brokerage firm. You then put a minimum investment into your deposit account (the minimum deposit for a brokered CD is usually around $1,000). After you make your deposit, the account will begin to accrue interest, and you’ll be able to withdraw your deposit plus the interest once the CD reaches its maturity date. You can also withdraw money from a brokered CD and sell it on the secondary market without incurring an early withdrawal fee.
Most brokered CDs are insured by the Federal Deposit Insurance Corporation (FDIC), which will cover up to $250,000. The FDIC protects consumers against loss of deposits in the case of an insured bank failure. This coverage is automatically applied to a brokered CD if the bank from which the brokerage firm purchased the CD is insured by the FDIC.
Brokered CDs vs. bank CDs
While the fundamental concept of a brokered CD and a bank CD is essentially the same, there are a few key differences you should be aware of before committing to one or the other. Here are some of the ways that brokered CDs and bank CDs differ from one another:
Deposit
The minimum deposit for a brokered CD tends to be higher than that for a bank CD, though usually not by too much. The typical minimum deposit amount for a brokered CD is $1,000, while the typical minimum deposit amount for a bank CD is around $500.
Fees
One of the major advantages of brokered CDs is that they do not usually incur a fee for early withdrawal. If you choose to withdraw money from a bank CD before the maturity date, you usually need to pay an early withdrawal penalty, but this fee is not applied to brokered CDs. The catch is that brokered CDs don’t allow you to simply withdraw your money either. Instead, you have to sell the CD. You don’t have to pay a fee or a penalty to sell it, but you do face the risk of the CD losing value when the time comes to sell. You may lose out on a bigger payout by selling a brokered CD if interest rates eventually increase.
Flexibility
Brokered CDs tend to have more flexibility than bank CDs, specifically with withdrawing money. A bank CD charges you for withdrawing money from the deposit before the maturity date, making it difficult to justify doing so. But because brokered CDs do not charge a fee to withdraw money before the maturity date, you have more flexibility with when you want to access your money.
Selection
When shopping around for certificates of deposit, you may have a wider selection to choose from among brokered CDs than among bank CDs. This broader variety of choices increases your chances of finding an account that offers the highest yield and best terms for your needs.
Payment periods
While bank CDs usually only pay interest upon maturity, brokered CDs may offer a variety of payment periods. For example, a brokered CD may pay interest semi-annually, monthly, or quarterly instead of only when the brokered CD matures. Not all brokers will offer this option on their CDs, but it could be worth finding one who will.
Rates
In most cases, brokered CDs have higher interest rates than bank CDs. However, brokered CDs accrue simple interest, while the interest on bank CDs compounds. This means that even at a less favorable interest rate, a bank CD could potentially generate more interest than a brokered CD in the long run. Always be sure to compare rates before committing to a CD to ensure that you’re getting the most competitive rate.
Secondary market
If you want to get your money out early, you can sell a brokered CD on the secondary market. This option is only available for brokered CDs, while bank CDs incur a fee for early withdrawal. However, having to sell a CD to cash out your money comes with its own risks.
Terms
Brokers usually offer brokered CDs with longer maturity terms. While bank CDs typically run between one month to five years, brokered CDs can run up to 20 years. This is merely the high end of brokered CD terms; if you so choose, you still have the option to get a brokered CD with a shorter term.
Details
Here are a few minor differences between brokered CDs and bank CDs to be aware of:
- While you open a bank CD through your own bank account, someone else must open a brokered CD account for you.
- You may have to pay a fee to a broker to open a brokered CD for you, while opening a bank CD likely won’t incur a fee.
- Many brokered CDs offer estate protection, which allows a beneficiary to redeem the deposit at face value if the holder dies.
- While both bank CDs and brokered CDs usually come with FDIC insurance, coverage tends to be more extensive for brokered CDs than for bank CDs.
Pros and cons of brokered CDs
As with all other financial decisions, there are several factors to consider before committing to a brokered CD. Here are some of the pros and cons of brokered CDs to help you figure out whether it’s the right choice for you:
Is a brokered CD right for you?
If you’re still not sure whether a brokered CD is the best option for you, here are a few questions to ask yourself:
- What term length am I looking for? If you’re looking for a CD with a longer term, then a brokered CD may be the better choice for you. Brokered CDs tend to offer a wide variety of term lengths, including terms that are much longer than most bank CDs.
- Do I want to consolidate multiple CDs? A brokerage account can consolidate several CDs from multiple banks into a single account. If you plan to accumulate multiple CDs, this could make managing them all a lot more convenient.
- Will I want to withdraw money before the CD matures? If you choose to withdraw money from a bank CD before the maturity date, you will have to pay an early withdrawal fee. You will not, however, have to pay this fee to withdraw from a brokered CD before it matures.
- What interest rate am I looking for? While not guaranteed, brokered CDs tend to have higher interest rates than bank CDs. If you’re looking for a higher rate, it may be worth seeking out a brokered CD.
In short, if you’re looking for a long-term CD with a high interest rate, the option to withdraw money early without paying a fee, or the convenience of consolidating multiple CDs into one account, then a brokered CD is likely the best choice for you.
How to buy brokered CDs
You’ll likely need a brokerage account in order to purchase brokered CDs. If you don’t already have one, you can ask your financial advisors or financial planners for recommendations. Before choosing a brokerage firm, be sure to review the firm’s credentials, certificates, and reputation.
When choosing a brokered CD, be sure to compare terms, rates, and fees, as well as the minimum required deposit amount.
FAQ
Are brokered CDs FDIC insured?
Brokered CDs are FDIC insured if the brokerage firm purchased its CDs from a bank insured by the FDIC.
Are brokered CDs better than bank CDs?
It depends on what your needs are. If you’re looking for longer terms and higher rates, then a brokered CD will likely be a better choice for you than a bank CD.
How do brokered CDs pay interest?
The accrued interest on brokered CDs can be paid monthly, quarterly, semi-annually, or when the CD matures.
Are brokered CDs safe?
As long as your broker purchased their CDs from an FDIC-insured bank, the brokered CDs they offer will have FDIC coverage, and thus will be a safe investment.
Key Takeaways
- Brokered CDs are certificates of deposit (CDs) purchased through a broker instead of a bank.
- Brokered CDs tend to have longer maturity terms and higher interest rates than traditional CDs from banks.
- Unlike with a bank CD, there is no early withdrawal fee if you take money out of a brokered CD before the maturity date.
- Most brokered CDs are insured by the FDIC, which protects up to $250,000 in each account.
While certificates of deposit are generally a safe investment, comparing CD rates can feel overwhelming. With so many different interest rates and term lengths offered by multiple banks, credit unions, and brokerage firms, it’s often hard to know which option is best for your needs. That’s where SuperMoney can help. Use our tool to find the best CD rates for you by comparing the different APYs, minimum opening deposits, and term lengths currently on the market!
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Camilla has a background in journalism and business communications. She specializes in writing complex information in understandable ways. She has written on a variety of topics including money, science, personal finance, politics, and more. Her work has been published in the HuffPost, KSL.com, Deseret News, and more.
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