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Yields on brokered CDs tend to surpass traditional offerings because they are somewhat riskier
By
Lyle Niedens
Full Bio
Lyle spent most of the past two decades in a variety of product, communication and financial writing roles with large asset managers and mutual fund distributors, mostly recently as vice president, director of product development with Waddell & Reed/Ivy Distributors Inc. Previously, he spent a decade in senior roles as an editor and reporter with business publications and financial news wires, including Dow Jones, BridgeNewsand Knight-Ridder Financial News. A graduate of the University of Kansas with an M.B.A. and a B.S. in journalism, he lives in Westwood, KS, a suburb of Kansas City, with his wife, Caryl, and their sons, Conley and Pierce.
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Updated June 20, 2023
:max_bytes(150000):strip_icc()/INV_BrokerageCDTopRates_GettyImages-1406675498-97e9f6699e69419ba2868097791c101a.jpg "Why Brokered CDs Offer Higher Rates (1)")
The Federal Reserve's campaign to raise interest rates has pushed rates on certificates of deposit (CDs) to their highest level in two decades. And in many cases, CDs offered through brokerage firms lead the way, often topping the returns of those available from retail banks and credit unions.
While offering enhanced flexibility compared with traditional offerings, brokered CDs also carry risks not inherent to their retail bank and credit union counterparts. That's why they routinely offer higher rates, according to financial advisors.
Key Takeaways
- 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.
- The higher minimum investment amounts associated with brokered CDs often draw investors with greater assets.
The Reasons Behind Attractive Brokered CD Rates
Brokered CDs are issued by banks and sold to investment firms and brokerages as bundles. The brokerages make them available to investors. In doing this, the broker brings a lot of money to the bank but the way brokered CDs are designed they are also susceptible to greater risks, which often results in higher annual percentage yields (APYs) than are offered for traditional CDs.
| Brokered CDs vs. Traditional CDs: Highest Available Rates | ||
|---|---|---|
| Term | Brokered CDs | Bank/Credit Union CDs |
| 3-month | 5.46% (Charles Schwab) | 5.16% (TotalDirectBank) |
| 6-month | 5.45% (Vanguard) | 5.65% (NASA Federal Credit Union) |
| 1-year | 5.50% (Vanguard, Charles Schwab) | 5.50% (Evergreen Bank Group) |
| 18-month | 5.50% (Vanguard, Charles Schwab) | 5.45% (NASA Federal Credit Union) |
| 2-year | 5.35% (Vanguard) | 5.25% (Summit Credit Union) |
| 3-year | 5.30% (Vanguard) | 5.13% (U.S. Senate Federal Credit Union) |
| 5-year | 5.25% (Vanguard) | 4.77% (Department of Commerce Federal Credit Union) |
Investors in brokered CDs need to set up an account at the brokerage offering the product, then purchase new CDs or ones from the secondary market. Some of the latter transactions might include a brokerage fee.
Market Risks
Desiree Kaul, a financial advisor with Satellite Beach, Florida-based Main Street Planning, said that because brokered CDs trade like bonds on secondary markets, they face market risk that can reduce their selling value if interest rates increase between their issuance and maturity dates.
Although brokered CDs don't have early withdrawal penalties, many have a "call option." This feature allows the financial institution that issues it to redeem the CD prior to maturity if interest rates change.
As a result of these call options, investors in brokered CDs face the risk that their investment may get redeemed before they can attain their expected returns. The issuing institution may do so, returning the principal investment, if interest rates fall to avoid paying higher CD rates than the prevailing market.
Higher Minimum Investment
Finally, brokered CDs typically have a minimum investment amount of $1,000. However, most brokered CDs attract much larger investment amounts. Peter Palion, a certified financial planner (CFP) with Master Plan Advisory in East Norwich, New York, said he usually sees brokered CDs investments in $50,000 increments.
The minimum investments and risks that brokered CDs present tend to appeal to larger investors, such as high-net worth individuals or institutional buyers, Palion said.
As a result of these factors, both the risks and the nature of this particular CD market, institutions offering brokered CDs typically offer higher rates to attract investors who could find relatively safer options with smaller initial investment requirements at retail banks or credit unions.
Rate Collection Methodology Disclosure
Every business day, Investopedia tracks the rate data of more than 200 banks and credit unions that offer CDs to customers nationwide, and determines daily rankings of the top-paying certificates in every major term. To qualify for our lists, the institution must be federally insured (Federal Deposit Insurance Corp. [FDIC] for banks, National Credit Union Administration [NCUA] for credit unions), and the CD's minimum initial deposit must not exceed $25,000.
Banks must be available in at least 40 states. And while some credit unions require you to donate to a specific charity or association to become a member if you don't meet other eligibility criteria (e.g., you don't live in a certain area or work in a certain kind of job), we exclude credit unions whose donation requirement is $40 or more. For more about how we choose the best rates, read our full methodology.
Article Sources
Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate. You can learn more about the standards we follow in producing accurate, unbiased content in oureditorial policy.
St. Louis Federal Reserve. "3-Month or 90-Day Rates and Yields: Certificates of Deposit for the United States."
Capital One. "Growing your money with CDs and brokered CDs."
Charles Schwab. "Certificate of Deposit."
Vanguard. "Brokered CDs."
Charles Schwab. "Explore Brokered CDs vs. Bank CDs."
Related Terms
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A jumbo certificate of deposit (CD) is a type of savings account with higher balance requirements than a traditional CD that, in return, pays a higher interest rate.
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What Is a Certificate of Deposit (CD) and What Can It Do for You?
A certificate of deposit (CD) is a type of savings account offered by banks and credit unions that pays a fixed interest rate on money held for an agreed upon period of time.
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Types of Specialty Certificates of Deposit (CDs) Explained
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Brokered CD Definition, Pros/Cons, Other Types
A brokered certificate of deposit is a CD that an investor purchases through a brokerage firm or from a sales representative other than a bank.
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Callable Certificate of Deposit (CD): What it Means, How it Works
A callable certificate of deposit (CD) is an FDIC-insured CD that contains a call feature similar to other types of callable fixed-income securities.
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