What are brokered CDs?
Our experts answer readers' banking questions and write unbiased product reviews (here's how we assess banking products). In some cases, we receive a commission from our partners; however, our opinions are our own. Terms apply to offers listed on this page.
PeopleImages/Getty Images
- You can buy a brokered CD at a brokerage firm or investment company.
- Brokered CDs generally pay higher interest rates than traditional CDs at banks.
- You may sell your CD to a secondary market before your term ends, but you could lose money.
If you're looking for a type of CD that offers a high interest rate, you might consider getting a brokered CD at an investment company.
Brokered CDs often pay more competitive interest rates than the average CD. However, brokered CDs may involve more risk than traditional ones at brick-and-mortar banks. To help see if a brokered CD may be a good option for you, we spoke with financial experts to explain how brokered CDs work and when they might be worth considering.
What is a brokered CD?
Brokerage firms and investment companies buy large quantities of CDs from one or more banks and sell them to brokerage customers as brokered CDs.
"They can — not in every instance — but they can pay more than say, a bank, credit union, or other financial institution. Sometimes investors who have a lot of money at that institution may be able to get a higher rate," says Marguerita Cheng, CFP professional, RICP, and chief executive officer at Blue Ocean Global Wealth.
Brokered CD vs. bank CD
You can use the chart below to better understand the similarities and differences between brokered CDs and bank CDs.
| Similarities | Differences |
|
|
How do brokered CDs work?
To buy a brokered CD, you have to be a customer of a brokerage firm or investment company. Hence, you generally have to open a brokerage account first.
Once you have a brokerage account, you can search for a brokered CD. You'll select the brokered CD you want and make one initial deposit upfront — typically, you'll need at least $1,000.
You'll earn a set interest rate on your money for the term and type of CD you choose. Interest may be earned on the account monthly, quarterly, or semiannually depending on the term and bank.
Ayad Amary, MBA, CFP, AIF, and founder of Wealthcare of the Lehigh Valley, points out that the value of a brokered CD fluctuates over time, similar to a bond. Brokered CDs have more liquidity than traditional CDs and can be sold on a secondary market.
"Because of that secondary market, the price will fluctuate up or down based on the broader interest rate market. In general, if interest rates go up, the value of your CD will go down, at least temporarily, unless you hold it to maturity," explains Amary.
Why might you sell a brokered CD on the secondary market?
Yusuf Abugideiri, CFP professional, partner, and senior financial planner of Yeske Buie, says you might consider selling a brokered CD on the secondary market if you don't have access to other assets that you can turn into cash easily.
If you decide to sell your CD on the secondary market, there may be fees. For example, Fidelity has a $1 trading fee per secondary CD sale with a par value of $1,000. Be aware that you could also lose money if you sell your CD to the secondary market before your term ends. This will depend on the market and whether the value of your brokered CD is less than when you first bought it.
Are brokered CDs a good idea?
Amary says brokered CDs could be a good option for people who have a defined purpose for a specific amount of money in their portfolio.
For example, if you plan to make a down payment on a house or a car in the next few years, Amary points out you'll likely want to keep your money in a place that doesn't involve a lot of risk. Investing in the stock market has more risk than putting your money in a brokered CD. If there's a stock market drop, you may not have time to recover from losses. If you have a brokerage account, you'll also have the ability to shop around for CD rates from several different financial institutions.
Cheng suggests creating a CD ladder if you want to have more flexibility with having access to your money. With a CD ladder, you'll open multiple CDs that have different terms. For example, you could get 1-year, 3-year, and 5-year terms. Since the CD ladder includes a short-term CD, you'll have access to some of your money sooner.
"If something happens between now and then, CD ladders, whether they're brokered or non-brokered, can be a great way to have your funds diversify with regard to maturity and interest rates," says Cheng.
Brokered CDs: Advantages and disadvantages
You can read more about the pros and cons of brokered CDs here:
Brokered CDs: Frequently asked questions
Are brokered CDs safe?
Brokered CDs are generally safe because they are issued by financial institutions. Brokerage firms or investment companies buy large quantities of CDs from banks and sell them to brokerage customers. CDs are protected for up to $250,000 per depositor through FDIC insurance. This means if a bank were to shut down, your money would still be safe.
Can a brokered CD lose money?
Yes, you could lose money if you decide to sell a brokered CD in a secondary market before your term ends. Depending on the market, the value of your brokered CD could be less than when you first bought it if interest rates change significantly. Generally, long-term brokered CDs involve higher interest rate risk than short-term ones.
What happens when a brokered CD reaches maturity?
The amount of money you deposited into your CD and the interest earned will be available for you to move somewhere else. Brokered CDs do not automatically renew.