What are brokered CDs?
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Brokered CDs are certificates of deposit purchased through a brokerage firm or broker. These time-deposit savings products are similar to traditional CDs found at a bank, but they differ in that they are purchased and sold on the secondary market through a brokerage account. Unlike traditional CDs, brokered CDs may be bought and sold before the maturity date.
Pros and cons of brokered CDs
Brokered CDs can be a good addition to a fixed-income portfolio, but they have some disadvantages and aren’t suited for everyone.
Pros of brokered CDs
- Liquidity: Traditional CDs require that you keep money in the account for a specified period of time, and there’s often an early withdrawal penalty for pulling money out before the CD’s maturity date. But with a brokered CD, you’re able to sell the CD on the secondary market without a penalty at any time, although a sales fee may apply.
- Terms: There are typically more terms available with brokered CDs than with traditional CDs.
- Convenience: Consumers can purchase CDs from more than one bank and keep them in a single account. For instance, you could purchase five CDs from five different banks (via the broker) and house them all in your brokerage account. That way you don’t have to open accounts at a variety of banks to get the highest CD yields.
- Higher rates (sometimes): Brokered CDs typically carry higher rates than those found at banks, but it pays to shop around. Some online banks may offer higher yields.
Cons of brokered CDs
- Higher risk: Though beneficial in certain situations, the liquidity of brokered CDs makes it easier to lose money. You could potentially lose money by selling too soon and for less than face value. Keeping the CD until its maturity date, however, can reduce the risk of losing money on it.
- Fees: Though there are no early withdrawal or monthly fees on brokered CDs, there may be a fee for selling them, which can eat into your earnings.
- Callable: Some brokered CDs can be called back before their maturity date. In other words, there’s a window of time when they can be closed by the bank before their maturity date and must be liquidated or transferred to a new CD. If your CD is called, you’ll miss out on full interest earnings.
- Rates: It’s not always the case that brokered CDs carry higher rates. You may find better deals at online banks. Plus, if interest rates continue to rise, the value of a brokered CD may fall.
When to consider brokered CDs over bank CDs (and when not to)
There are certain circumstances when it makes more sense to get a brokered CD over a CD from a bank. Here are a few:
- You need more liquidity than bank CDs offer. Brokered CDs can be sold like bonds on the secondary market for whenever you need the cash. Bank CDs typically require you keep your money in a CD for the full maturity; otherwise, you could get charged a stiff early withdrawal penalty.
- You want to consolidate multiple CDs in a single account. Brokerage firms like Fidelity and Vanguard allow you to purchase brokered CDs from several different banks at once and house them in a single brokerage account, providing a wider variety of options and greater convenience.
- The CD terms offered by banks are not long enough for your particular goals. CDs purchased from a brokerage can have terms of up to 20 years. That’s not something you’ll generally find with bank CDs.
- The money in your bank CD isn’t fully covered by federal insurance. The Federal Deposit Insurance Corp. (FDIC) insures your money up to $250,000 per bank. However, you can keep CDs from multiple banks in a single brokerage account if it’s insured, expanding your FDIC coverage.
- You’re looking for higher rates. Historically, brokered CDs have paid more than CDs found at banks because they’re in a more competitive market. Though that can still be the case, it’s not a guarantee.
Here are some situations when a bank CD might be better:
- You want to take on less risk. Because brokered CDs can be bought and sold on the secondary market or called back before their maturity date, they are riskier investments than bank CDs.
- You want less complexity. Purchasing a brokered CD takes a little more research and work than investing in a CD from a well-known bank. Plus, closing a brokered CD early is more complicated than with a traditional bank.
- Selling on the secondary market is too risky for your current financial situation. The only way to get money out of a brokered CD is to sell it. If you think you’ll need access to funds without the risk of selling a CD for less, you may want to consider a no-penalty, or liquid, CD or high-interest savings account.
How to buy a brokered CD
To buy a brokered CD, you must first have an account at a brokerage or institution that sells brokered CDs.
After opening a brokerage account, customers can buy brokered CDs in a similar way to how other investments are purchased. Select the term of the brokered CD and the amount you’d like to put into it. When shopping for a brokered CD on the secondary market, you choose from a selection of CDs available for sale.
When choosing between brokered CDs, there are a few important details to consider:
- Fees: Some brokerages charge a fee for buying and selling CDs on the secondary market but not for purchasing newly issued CDs, which may affect your choice of CD.
- Minimums: Most brokerages will set a minimum amount that you must invest to buy a brokered CD and may require that you invest in minimum increments. Before opening a brokerage account or buying a CD, make sure you can meet the minimum investment requirement.
- Callable vs. noncallable CDs: With a callable CD, the issuer can call (or pay back) the CD before its maturity date. If it does, the issuer pays the CD holder a set amount and closes out the account. Typically, CD issuers call a CD if market rates drop and they’re paying more on old CD balances than they are for newly issued CDs. A callable CD is less predictable than a noncallable CD, which requires an issuer to continue paying the same interest rate for the life of the CD and prohibits closing the account early.
Where to find brokered CDs
It’s possible to find brokered CDs from large brokerage firms, financial advisors, financial planners and other types of financial consultants.
Charles Schwab, for example, is a financial-services company that provides brokerage accounts and offers a wide range of CD options.
New-issue CDs from Schwab can be purchased commission free with as little as $1,000. For online trades on the secondary market, Schwab charges a $1 transaction fee for each CD, with a $10 minimum and $250 maximum. A $25 per-trade service charge applies to broker-assisted transactions.
Vanguard, one of the largest investment companies in the world, also offers a range of CD options. It has a dealer network for its brokered CDs. There’s a $1,000 minimum for its CD purchases of terms ranging from one month to 20 years. Vanguard doesn’t charge a commission for CDs, but it does charge a fee of $1 per $1,000, with a $250 maximum for CDs sold on the secondary market.
Can you lose money in a brokered CD?
Market interest rates frequently fluctuate, which means that the market value of a CD fluctuates, too. If a CD is sold on the secondary market at a lower value than its face value, it will have lost money.
But there are no losses if the CD is kept until maturity. The issuer will pay back the face value and the accumulated interest at the end of the term.
Are brokered CDs FDIC insured?
Brokered CDs are typically insured by the FDIC up to $250,000 each. The fine print, however, is that not all brokerage firms partner with federally insured banks. To get FDIC coverage, the brokered CD must be from a federally insured bank.
It’s also possible to expand your FDIC coverage through brokered CDs. Since federal insurance covers $250,000 for each bank, someone who buys CDs from different banks and keeps them in a brokerage account will have separate insurance for each CD. For example, if you buy one CD for $200,000 issued by Bank of America and one CD for $150,000 issued by Wells Fargo, both CDs are fully insured by the FDIC. Then, you have $350,000 in total FDIC coverage. If both CDs were from the same bank, only $250,000 of the total amount would be covered.
Brokered CDs function similarly to other types of CDs, but they are kept in a brokerage account and can be traded like bonds. Consider a brokered CD if you’re looking for more liquidity, want more term options or higher rates, or need to expand FDIC insurance.
If you’re looking for a CD that comes with minimal risk, compare traditional CD options to find the best rate and a term that fits your needs.
–Staff writer René Bennett contributed to this article.