What Are Brokered Certificates of Deposit (CDs)?
Understand The Basics
Brokered Certificates of Deposit (CDs) are CDs you buy through a financial intermediary. Instead of purchasing a CD directly through your bank or credit union, you typically get brokered CDs in a brokerage account. It’s critical to understand how you buy brokered CDs, how you’re paying for them, and what to watch out for if you’re considering these investments.
Brokered CDs, as the name suggests, are brokered. It means that somebody (you or your financial advisor, for example) surveys the marketplace to find the best CD rates available. Like other CDs, you agree to keep your money in the CD for a specified term, and a bank agrees to pay you a certain amount of interest.
In some cases, brokered CDs are long term investments with maturities that are much longer than standard bank-issued CDs. Although those products may have their merits, customers sometimes don’t understand what they’re getting into, or a salesperson misleads them.
Research the person you’re working with, and ask detailed questions about how and when you get your money back from a brokered CD.
Brokered CDs have several unique features. First, you open up your investment choices to a broad universe of banks. Contrast this with a situation where you contact your bank or credit union and ask about CDs. Banks typically only offer their own CDs. When you use brokered CDs, you should have access to CDs from a variety of different financial institutions. Sometimes this can work to your advantage if local banks are not eager to take in more deposits and are therefore keeping rates relatively low.
With some brokered CDs, you buy and sell as if you’re using other fixed-income investments. There is typically a limited supply, and there may be a minimum required order size (such as $10,000). You can potentially trade brokered CDs in the secondary market, but the volume and demand may be extremely limited — making it difficult to get a good price.
Where to Find Them
Financial advisors, brokerage houses, financial planners, and financial consultants may offer brokered CDs. Simply put, any person who can shop around for securities can probably find you a brokered CD. You can also do it yourself at some online investing providers.
Costs Associated With Brokered CDs
In many cases, your “cost” comes out in the Annual Percentage Yield (APY) that you earn on your money. It is similar to a bank: Banks don’t usually charge you a well-defined “fee” to invest in a CD. Instead, banks choose how much to pay in interest, and they attempt to earn more than they’re paying out. The same is true for brokered CDs — your APY often depends on how much any intermediaries want to earn on the deal.
Some intermediaries (like your broker or financial advisor) may charge you a modest transaction fee to buy brokered CDs. It may be a ticket-charge that they have to pay for placing your order, and it could be a flat fee (or a fee for each $1,000 you invest).
Finally, you may be paying a fee under another arrangement, perhaps based on assets-under-management or a flat-fee agreement. If you choose to pay ongoing fees, it should happen only if the CD broker handles all of your rate shopping, research, and renewals for you (or provides other valuable services).
Selling at a loss: A significant risk of brokered CDs is market risk, which may come from interest rate risk. This is the risk that you’ll sell your CD on the secondary market for less than you paid. Ideally, you’ll keep your CDs until maturity and eliminate that risk. However, life is uncertain, and you may need to cash out if your plans change. CDs can act like bonds: If interest rates rise, buyers in the secondary market may not want to pay face value for an instrument paying a relatively low amount.
Bank failures: Another risk of brokered CDs is the risk that you’ll lose your money. Verify that any issuing banks are safe and FDIC-insured. You might be tempted by attractive CD rates that are much higher than you can find locally, but the tradeoff is that you need to assume more risk. For most CD buyers, the idea is to avoid risk.
Scams and fraud: Con artists have used brokered CDs to steal money from investors, so you need to use caution. If something sounds too good to be true, it probably is. What’s more, brokers might not deceive you, but they may fail to fully explain what you’re getting into — leading to unpleasant surprises down the road.
We can’t cover every conceivable risk here, and we might not even identify the biggest risks. It’s critical to understand what you’re buying and read any disclosures available to you carefully.
Federal Deposit Insurance Corporation (FDIC). "When a Broker Offers a Bank CD: It Pays to Do Some Research," Accessed Dec. 26, 2019.