Key Takeaways
- Brokered CDs are purchased through a brokerage, not directly from a bank or credit union.
- This gives the investor access to CDs from many different sources.
- A benefit is that it can lead to a higher interest rate.
- Be wary of scams or the risk of losing money if you have to sell early.
Definition and Examples of Brokered Certificates of Deposit (CDs)
Brokered CDs, as the name suggests, are brokered. It means someone (you or your financial adviser, for example) surveys the marketplace to find the best CD rates available. 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.
For example, Fidelity offers brokered CDs with terms that range from a few months up to five years, and interest rates that are higher for CDs for longer terms.
Note
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. Research the person you’re working with and ask detailed questions about how and when you get your money back from a brokered CD.
How Brokered CDs Work
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.
Brokered CDs have several unique features. First, you open 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 offer only their own CDs. Brokered CDs provide access to CDs from a variety of different financial institutions. Sometimes this can work to your advantage if local banks are limiting new deposits by 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. This makes it difficult to get a good price.
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.
Note
Some intermediaries (like your broker or financial adviser) may charge you a modest transaction fee to buy brokered CDs. It may be a ticket-charge 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).
Potential Risks
Though CDs are low-risk, generally speaking, brokered CDs introduced nuanced risk that you need to be mindful of.
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.
FAQs
A brokered CD is a type of CD you can buy through a broker or brokerage firm rather than a bank. With a brokered CD, you can get most benefits a traditional CD offers plus take advantage of longer terms and higher interest earnings. At the same time, it isn't a perfect option for everyone.
What is the difference between a brokered CD and a regular CD? ›
Purchase process: A bank CD is a deposit product, where you begin earning interest immediately upon deposit. A brokered CD is an investment purchased in a securities account similar to the way a security is purchased. With the brokered CD, you don't start earning interest until settlement date of the trade.
Is there a downside to brokered CDs? ›
Disadvantages of a Brokered CD
In particular, buying a long-term brokered CD exposes investors to interest rate risk. A 20-year brokered CD can decrease substantially in price if an investor has to sell it on the secondary market after a few years of rising interest rates.
How do brokered CDs pay interest? ›
Your brokered CD generates simple interest based on the payment frequency of the issuing bank. Once the interest is earned it goes directly into your settlement fund in the account in which you purchased the brokered CD.
What happens to a brokered CD when it matures? ›
You'll also want to take a look at how the brokerage pays out CD interest and what happens when a brokered CD matures. While bank CDs can renew automatically, brokered CDs do not. Instead, the principal and interest earned are deposited into your brokerage account at maturity.
Are brokered CDs as safe as bank CDs? ›
However, brokered CDs are still safe in the sense that they're protected by a bank's FDIC insurance. The issuing bank can call a brokered CD. This may cause you to miss out on potential future earnings.
Can a brokered CD lose money at maturity? ›
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.
What happens to brokered CDs if the bank fails? ›
Your money may not be protected: The money you invest in a brokered CD is protected only if it's provided by a bank insured by the Federal Deposit Insurance Corporation or a credit union insured by the National Credit Union Administration. If it's not, you could lose all your funds if the financial institution fails.
Why are brokered deposits bad? ›
Brokered deposits, on the other hand, are considered a riskier source of funds for a bank because they are impacted greatly by interest rate changes.
Do you pay taxes on brokered CDs? ›
Interest earned on CDs is considered taxable income by the IRS, regardless of whether the money is received in cash or reinvested. Interest earned on CDs with terms longer than one year must be reported and taxed every year, even if the CD cannot be cashed in until maturity.
Brokered CDs are issued by banks and sold to brokerages in bulk. Brokerages then turn around and sell those CDs to customers. Since brokerages purchase them in bulk, they can negotiate better interest rates on brokered CDs and offer higher rates than those on traditional CDs.
Can you get 6% on a CD? ›
Finding reliable 6% CD rates
You can find 6% CD rates at a few financial institutions, but chances are those rates are only available on CDs with maturities of 12 months or less. Financial institutions offer high rates to compete for business, but they don't want to pay customers ultra-high rates over many years.
What is considered a good 6 month CD rate right now? ›
The national average return on a 6-month CD is currently 1.49%. Online banks, however, offer much higher returns — as high as 5.50% APY right now.
What happens to a brokered CD when the owner dies? ›
If the owner of a CD account passes away, the CD beneficiary can claim that account. This typically means contacting the financial institution where the CDs are held and offering proof of identity. The bank may also need to see a copy of the account owner's death certificate.
Who has the highest paying CD right now? ›
The Best CD Rates by Term
| Term | APY | Account Name |
|---|
| No Penalty CD (6 Months) | 5.34% APY | Climate First Bank 6 Month No Penalty CD |
| 3 Month | 5.51% APY | TotalDirectBank 3 Month CD |
| 6 Month | 5.55% APY | Newtek Bank 6 Month CD |
| 1 Year | 5.60% APY | Northern Bank Direct 1 Year CD |
5 more rowsBest 1-Year CD Rates
- Apple Federal Credit Union – 5.40% APY.
- NexBank – 5.40% APY.
- CIBC Agility – 5.36% APY.
- TotalDirectBank – 5.35% APY.
- CFG Bank – 5.31% APY.
- Rising Bank – 5.31% APY.
- First Internet Bank – 5.31% APY.
- Northpointe Bank – 5.30% APY.
A brokered CD is similar to a traditional one but may provide you with a higher yield and more flexible loan term options. These CDs also offer more liquidity since you can resell them on the secondary market before their maturity date and avoid an early withdrawal penalty.
Why are brokered CD rates higher than bank? ›
Brokered CDs are issued by banks and sold to brokerages in bulk. Brokerages then turn around and sell those CDs to customers. Since brokerages purchase them in bulk, they can negotiate better interest rates on brokered CDs and offer higher rates than those on traditional CDs.
Are brokered CDs taxable? ›
Interest income from CDs is generally subject to income tax. Yield to Maturity (YTM) represents the return an investor will receive if a CD is held to term. Annual Percentage Yield (APY) is also quoted and represents the return earned based on a simple interest calculation that includes the effect of compounding.
Why are brokerage CD rates higher? ›
Buyers of brokered CDs often earn higher interest on them than traditional CDs but also are exposed to more market risks. The higher rates for brokered CDs are typically to offset heightened risk and greater required minimum balances.
