What are brokered CDs and should you open one?

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Brokered certificates of deposit (CDs) have become an increasingly popular option for investors seeking a low-risk way to earn more interest on their savings.

A brokered CD is offered by a brokerage firm instead of a bank. These CDs often come with higher interest rates and more flexibility than traditional CDs.

But how exactly do brokered CDs work? We’ll explain the pros and cons and help you determine if a brokered CD fits your financial goals.

How do brokered CDs work?

But with a brokered CD, you deposit your money with a brokerage firm, like Charles Schwab or Fidelity. The brokerage firm, acting as an intermediary, then uses those funds to purchase CDs issued by various banks.

“Brokered CDs can be much less hassle for the investor than bank-issued CDs,” says certified financial planner Ohan Kayikchyan. “With a broker, you have access to the best rates on CDs from banks nationwide. Brokered CDs have the option of longer terms than banks typically offer — up to 20 or 30 years.”

You can buy and sell your CDs anytime on this secondary market, even before the CD’s maturity date. Typically, brokered CD terms range from six months to over 20 years. Remember that the interest rates on brokered CDs are determined by supply and demand and may fluctuate.

Brokered CDs make it easier to access some of the highest CD rates on the market. You can purchase multiple CDs from different banks and keep them within your brokerage account instead of managing them separately.

Brokered CDs vs. traditional CDs

When you invest in any CD, you’re essentially lending money to an institution for a set period of time, ranging from a few months to several years. In return, you receive fixed interest payments at a fixed rate until the maturity date. At maturity, your initial investment is returned to you.

Traditional CDs are issued directly by banks and credit unions. On the other hand, brokered CDs are not issued by banks but bought and sold through brokerage firms or financial advisors.

One of the critical advantages of brokered CDs is the ability to access a broader range of CD offerings. With traditional CDs, you are limited to the offerings of a single institution.

Brokered CDs allow you to choose from various CDs from different banks, allowing you to diversify your investment and potentially increase the interest you can earn.

Pros and cons of brokered CDs

Like any financial product, brokered CDs have unique advantages and disadvantages.

Should I invest in a brokered CD?

Brokered CDs can be an excellent fixed-income investment, but they aren’t for everyone. You should consider opening a brokered CD right now if you’re:

• Are looking for liquidity and flexibility in accessing their funds
• Have larger sums of money to invest
• Want a broader range of terms and options compared to traditional CDs
• Prefer the convenience of purchasing CDs from multiple banks and consolidating them into a single account
• Are willing to take on some risk in exchange for potentially higher yields

If you’re looking to earn more interest on your savings with less risk, you may want to consider a high-yield savings account, which comes with competitive rates and liquidity.

Frequently asked questions about brokered CDs

If you’re still wondering if brokered CDs could meet your savings goals, here are some answers to common questions.

How do I open a brokered CD?

Opening a brokered CD is a pretty straightforward process. First, you'll need to choose a brokerage firm and create an account with them. Then, you can select the brokered CD that best suits your needs, considering factors like term length and interest rate.

Are brokered CDs safe?

Brokered CDs are relatively safe investments, though it depends on the brokerage's reputation and issuing banks. If the bank is FDIC-insured, your money is protected up to $250,000 per person, per account.

It’s important to note that brokered CDs may not be as easily accessible as traditional bank CDs and may have potential liquidity risks if you sell them before maturity. Additionally, fluctuations in interest rates can affect the value of brokered CDs in the secondary market.

Can I lose money investing in a brokered CD?

While brokered CDs are generally considered low-risk investments, there’s still a potential to lose money.

This can happen if you sell the CD in the secondary market before its maturity date, where the price may be lower than what you originally paid. Or, if the issuing bank or institution faces financial difficulties, there's a risk of losing your investment.

To lower risk, it's essential to research and choose reputable banks and assess your own investment goals and risk tolerance before investing in a brokered CD.

Editorial Disclaimer: Opinions expressed are author's alone, not those of any bank, credit card issuer, or other entity. This content has not been reviewed, approved, or otherwise endorsed by any of the entities included in the post.