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 you can purchase and sell them on the secondary market through your brokerage account.

Pros and cons of brokered CDs

Depending on your financial needs, brokered CDs might fit well into your fixed-income portfolio. But it’s important to know the advantages and disadvantages before you invest.

Pros of brokered CDs

The pros are:

  • Liquidity: One of the biggest advantages to brokered CDs is their 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 sometimes there is a sales fee.
  • Terms: You’ll typically find a wider range of terms with brokered CDs than with traditional CDs.
  • Convenience: You can shop and 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 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. However, it’s important to shop around. You might be able to find better deals out of online banks.

Brokered CDs also allow you to expand insurance from the Federal Deposit Insurance Corporation (FDIC). Like traditional CDs, brokered CDs are issued by banks and are typically insured by the FDIC up to $250,000 per depositor per bank — you’ll get that protection as long as the brokerage firm partners with federally insured banks. One strategy to expand your FDIC insurance is to purchase CDs from several banks and keep it in your brokerage account. Each CD bought from a different bank is insured up to $250,000. But check with your broker to see if the broker CD is protected by FDIC insurance — not all of them are.

Cons of brokered CDs

The cons are:

  • Higher risk: You could potentially lose money by selling it too soon. Though beneficial in certain situations, the liquidity of brokered CDs makes it easier to lose money. The main risk is that you sell your CD for less than you paid. To avoid that pitfall, it’s ideal to keep your CD until its maturity date.
  • Fees: Though there are no early withdrawal penalties, fees for selling your brokered CD can eat into your interest 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 pulled before their maturity date. 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.

Another potential downside of brokered CDs is that some of them aren’t insured. You might get a higher rate out of uninsured CDs, but you’re taking on a bigger risk. Don’t assume all brokered CDs are backed by the FDIC.

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:

  • If you need more liquidity than bank CDs offer. Brokered CDs can be sold like bonds on the secondary market, allowing you to offload them whenever you need the cash. Bank CDs typically require you keep your money in a CD for the full maturity, otherwise you could get hit with a stiff early  withdrawal penalty.
  • If you want CDs from many banks 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. This provides a wider variety of options and greater convenience.
  • If you want longer CD terms than typically offered at a bank. CDs purchased from a brokerage can have terms of up to 20 years. That’s not something you’ll generally find with bank CDs.
  • If you want FDIC insurance beyond the limit of a single bank. The FDIC insures your money up to $250,000 per bank. However, you can keep CDs from multiple banks in a single brokerage account, expanding your FDIC coverage. But check with your broker first to make sure the brokered CD is insured.
  • If 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 you might want to consider a bank CD:

  • If 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.
  • If 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.
  • If you need more liquidity and don’t want to risk selling on the secondary market. The only way to get money out of a brokered CD is to sell it. If you think you’ll need access to funds, you may want to consider a liquid CD or high-interest savings account.

How to buy a brokered CD

The first thing that you’ll need to buy a brokered CD is an account at a brokerage or another entity that sells brokered CDs.

Once you’ve opened your brokerage account, you can buy brokered CDs in much the same way that you purchase other investments, like stocks, bonds or mutual funds. You select the term of the brokered CD and the amount you’d like to put into the CD. If you’re buying the brokered CD on the secondary market, you can choose from the CDs available for sale.

Place the order, give your brokerage the necessary funds, and you’ll receive the brokered CD.

When choosing between brokered CDs, there are a few things that you should consider:

  • Fees: There may be fees associated with buying brokered CDs. Some brokerages will make you pay 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 make 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. non-callable CDs: Your broker may offer two different types of CDs: callable CDs and non-callable CDs. With a callable CD, the issuer can decide to call the CD at set times. If it does, the issuer will pay the CD holder a set amount and close out the account. Typically, CD issuers will 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 non-callable CD. With a non-callable CD, an issuer must continue paying the same interest rate for the life of the CD and cannot close 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.

For example, Charles Schwab is a banking institution 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 and in terms ranging from one month to 20 years. For online trades on the secondary market, Schwab charges a $10 minimum and $250 maximum. Broker-assisted trades cost the online price in addition to a $25 per trade service charge.

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.

Bottom line

Brokered CDs function much like traditional CDs found at banks, but they are kept in a brokerage account and can be traded like bonds. Consider these products if you’re looking for more liquidity out of CD, want more term options, need to expand FDIC insurance or if you’re seeking higher rates.

TJ Porter contributed to an update of this article.

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