Brokered Certificates of Deposit (CDs): What They Are and How They Work

By Rebecca Lake · June 06, 2024 · 13 minute read

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Brokered Certificates of Deposit (CDs): What They Are and How They Work

A brokered CD is a CD that’s sold by a brokerage firm or a deposit broker (an individual that can place financial deposits in an institution on behalf of a third party), rather than a bank. Brokered CDs may offer higher rates than traditional CDs sold at a bank, but they may also entail greater risk for investors.

Before investing in brokered CDs, it’s important to understand how they work, how they differ from traditional CDs, and the potential pros and cons of these accounts.

What Is a Brokered Certificate of Deposit?

A certificate of deposit is a type of savings account that allows you to deposit money and earn interest over a set time period called the term, which is usually a few months to five years. When a traditional CD reaches maturity, you can withdraw the principal plus interest, or roll it over to another CD. Traditional CDs are generally FDIC insured.

A brokered CD is a CD that’s offered by a broker or brokerage firm that’s authorized to act as a deposit broker on behalf of an issuing bank. These CDs often function more like bonds and they may be sold on the secondary market. Brokered CDs tend to be FDIC insured — as long as the CD was bought by the broker from a federally-insured bank.

What is a brokered CD in simpler terms? It’s a CD you buy from a brokerage. A deposit broker buys the CDs from a bank, then resells them to investors. Brokered CDs are held in a brokerage account. They can earn interest, but instead of only being static investments that you hold until maturity like traditional CDs, you can trade brokered CDs like bonds or other securities on the secondary market.

Compared to a standard CD, a brokered CD may require a higher minimum deposit than for a traditional bank CD. The trade-off, however, is that brokered CDs may potentially offer higher returns than you could get with a regular CD.

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How Brokered CDs Work

To buy a brokered certificate of deposit, you first need to find a deposit broker that offers them. Banks can issue CDs specifically for the customers of brokerage firms. These CDs may be issued in large denominations, say several million dollars. The brokerage would then break that large CD into smaller CDs to offer to its customers.

You could buy a brokered CD, depositing the minimum amount required or more. The brokered CD then earns interest, with the APY typically corresponding to the length of the maturity term. While longer terms typically earn higher interest rates, currently, short term CDs are offering higher rates because banks believe the Federal Reserve may cut the interest rate in the future. For example, you might be offered a 12-month brokered CD earning 5.40% or a 24-month brokered CD that yields 5.25%.

Ordinarily, you’d have to keep the money in your CD until the CD matures (if you withdraw the funds before the CD matures, you could face an early-withdrawal penalty). You could then roll the original deposit and interest into a new CD or withdraw the total amount.

With brokered CDs, on the other hand, you have the option to sell the CD on the secondary market before it matures.

Examples of Brokered CDs

Many online brokerages offer brokered CDs, including Fidelity, Vanguard and Charles Schwab, to name just a few. Here are the rates on some brokered CDs, as of late May 2024.

Vanguard: Up to 5.50% APY for a 10- to 12-month brokered CD

Fidelity: Up to 5.40% APY for a 6-month brokered CD

Charles Schawb: Up to 5.51% APY for a 3-month brokered CD

Advantages of a Brokered CD

Brokered CDs can offer several advantages, though they may not be the best option for every investor. Here are some of the potential benefits of a brokered certificate of deposit.

More Flexibility Than Traditional CDs

Brokered CDs can offer more flexibility than investing in bank CDs in the sense that they can have a variety of maturity terms, so you can choose ones that fit your needs and goals. You might select a 90-day brokered CD, for example, if you’re looking for a short-term investment or choose one with a 2-year maturity if you’d prefer something with a longer term. It’s also possible to purchase multiple brokered CDs issued by different banks and hold them all in the same brokerage account for added convenience.

Easier to Get Money Out Early on the Secondary Market

With a standard CD, you’re more or less locked in to the account until it matures. (While you could take money out early if your bank allows it, it’s likely you’ll pay an early withdrawal penalty to do so. This penalty can reduce the amount of interest earned.) Brokered CDs don’t have those restrictions; if you need to get money fast then you could sell them on the secondary market, effectively cashing out your principal and interest gains — without a penalty.

Higher Yields Than Standard Bank CDs

Deposit brokers that offer brokered certificates of deposit can use the promise of higher interest rates to attract investors. Rather than earning 1.00% on a CD as you might at a bank, you could potentially earn 5.00% or more with a brokered CD. If you’re seeking higher returns in your portfolio with investments that offer greater liquidity, brokered CDs could hit the mark.

You may also get a higher yield from a brokered CD versus a bond, with greater liquidity to boot.

Potential to Make Profit Once It Reaches Maturity Even If Interest Rates Fall

Interest rates for brokered CDs are locked until maturity. So even if rates fall during the maturity period, you could still profit when you sell the brokered CD later. As a general rule, shorter-term brokered CDs are less susceptible to interest rate risk than ones with longer terms.

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Disadvantages of a Brokered CD

Brokered CDs can have some drawbacks that investors need to know about.

Long-Term Brokered CDs Expose Investors to Interest Rate Risk

As mentioned, the longer the CD term the more exposure you have to interest rate risk. Brokered CD prices are subject to fluctuations on the secondary market. If interest rates rise, this usually has an inverse effect on the market price of existing brokered CDs. That means if you were to sell those CDs before maturity, you run the risk of getting less than what you paid for them.

Different Risk When Interest Rates Fall

You can also run into a different type of risk when rates are dropping if your brokered CDs are callable. A callable CD means the issuing bank can terminate or call the CD prior to maturity, similar to a callable bond. Callable brokered CDs can be problematic when rates drop because you’re forced to cash in your investment. In doing so, you’ll miss out on the full amount of interest you could have earned if you’d been able to hold the CD to maturity.

Temptation to Sell May Be Costly

The early withdrawal penalty associated with bank CDs actually serves an important purpose: It keeps you from taking money out of your CD early. Since brokered CDs don’t have this penalty, there’s nothing stopping you from selling your CDs on the secondary market whenever you like. That means it’s easier to cash out your investment, rather than sticking with it, which could cost you interest earnings.

Comparing Brokered CDs to Other CDs

When deciding whether or not to invest in a brokered CD, it can be helpful to compare them to other types of CDs to see how they stack up.

Brokered CD vs Bank CD

Bank CDs are typically purchased from a bank. They are purchased for a set period of time and must be held until maturity. If you want to cash out the CD early you will generally have to pay an early withdrawal penalty.

Brokered CDs are purchased from a deposit broker or brokerage house. They don’t have early withdrawal penalties so you can sell them on the secondary market if you choose to do so.

Brokered CD vs Bull CD

A bull CD is a CD that offers investors an interest rate that’s tied to an index or benchmark like the S&P 500 Index. Investors are also guaranteed a minimum rate of return. Bull CDs can also be referred to as equity-linked or market-linked CDs.

Brokered CDs earn interest but the rate is not tied to a market index. Instead, the rate is fixed for the maturity term.

Brokered CD vs Bear CD

Bear CDs are the opposite of bull CDs. With this type of CD, interest is earned based on declines in the underlying market index. So in other words, you make money when the market falls.

Again, brokered CDs don’t work this way. There is no index correlation; returns are based on the interest rate assigned at the time the CD is issued.

Brokered CD vs Yankee CD

Yankee CDs are CDs issued by foreign banks in the U.S. market. For example, a Canadian bank that has a branch in New York might offer Yankee CDs to its U.S. customers. Yankee CDs are typically suited to higher net worth investors, as they may require $100,000 or more to open. Unlike brokered CDs, which have fixed rates, a Yankee CD may offer a fixed or floating rate.

This chart offers an at-a-glance comparison of the CDs mentioned above and how they work.

Brokered CD

Bank CD

Bull CD

Bear CD

Yankee CD

Issued by a bank, sold by a brokerageIssued and sold by a bankIssued by a bank, sold by a brokerageIssued by a bank, sold by a brokerageIssued by a foreign bank and sold in the U.S.
Earns a fixed interest rateEarns a fixed interest rateEarns an interest rate that correlates to an underlying indexReturns are tied to an underlying market indexMay offer a fixed or floating rate
Maturity terms are fixed; however, brokered CDs can be sold on the secondary market before maturityMaturity terms are fixedInvestors are guaranteed a minimum rate of returnInterest is earned based on declines in the marketMaturity rates can be fixed or variable
May be FDIC-insured when issued by a qualifying bankFDIC-insuredNot FDIC-insuredNot FDIC-insuredNot FDIC-insured

How to Buy a Brokered CD

If you’d like to buy a brokered CD, you’ll first need to find a brokerage that offers them. You can then open a brokerage account, which typically requires filling out some paperwork and verifying your ID. Most brokerages let you do this online to save time.

Once your account is open, you should be able to review the selection of brokered CDs available to decide which ones you want to purchase. When comparing brokered CDs, pay attention to:

•   Minimum deposit requirements

•   Maturity terms

•   Interest rates

•   Fees

Also, consider whether the CD is callable or non-callable as that could potentially affect your returns.

Are Brokered CDs FDIC Insured?

Brokered CDs are generally FDIC-insured if the bank issuing them is an FDIC member. The standard FDIC coverage limits apply. Currently, the FDIC insures banking customers up to $250,000 per depositor, per account ownership type, per financial institution. You have to be listed as the CD’s owner in order for the FDIC protection to kick in.

There is an exception if brokered CDs function more like an investment account. In that case, you would have no FDIC protection. The FDIC does not consider money held in securities to be deposits and encourages consumers to understand where they’re putting their money so they know if they’re covered or not.

However, it’s possible that you may be covered by the Securities Investor Protection Corporation (SIPC) if a member brokerage or bank brokerage subsidiary you have accounts with fails.

Are Brokered CDs Better Than Bank CDs?

Brokered CDs do offer some advantages over bank CDs, in terms of flexibility, liquidity, and returns. You’re also free from withdrawal penalties with brokered certificates of deposit. You could, however, avoid this with a no-penalty CD.

What is a no-penalty CD? Simply put, it’s a CD that allows you to withdraw money before maturity without an early withdrawal fee. Some banks offer no-penalty CDs, along with Raise Your Rate CDs and Add-On CDs to savers who want more than just a standard certificate of deposit account.

Here’s something else to keep in mind. You’ll typically need more money to invest in brokered CDs vs. bank CDs. And you’re taking more risk with your money, since brokered CDs are more susceptible to market risk and interest rate risk.

Bank CDs, by comparison, are generally lower-risk investments.

When to Consider Brokered CDs Over Bank CDs

You might choose a brokered CD over bank CDs if brokered certificates of deposit are offering competitive rates and you plan to hold the CD until maturity. Even if rates were to rise during the maturity period, you could still realize a gain when it’s time to cash the CD out.

Paying attention to interest rates can help you decide on the right time to invest in a brokered certificate of deposit. Also, consider the minimum investment and any fees you might pay to purchase the CD.

When to Consider Bank CDs Over Brokered CDs

You might consider bank CDs over brokered CDs if you’d prefer to take less risk with your money. CDs are designed so that you get back the money you put into them, along with the interest earned. Typically, the only time you might lose money from a bank CD is if you cash it out early and have to pay an early withdrawal penalty.

Bank CDs may also be more attractive if you don’t want to tie up your money in a single brokered CD. For example, instead of putting $10,000 into a single brokered certificate of deposit you might spread that out across five or six bank CDs with different maturity dates instead.

This is called CD laddering. Creating a CD ladder can provide some flexibility, since it may be easier to avoid early withdrawal fees if a maturity date is always on the horizon. You could also use a CD ladder to capitalize on rising rates by rolling CDs over once they mature.

Finally, keep in mind that buying CDs is not the only way to save money and potentially help it grow. For instance, if you’re committed to saving, and you want to earn more interest than you’d get with the standard savings account, you might also want to consider opening a high-yield savings account. Taking some time to explore your options can help you determine the best savings vehicles for your needs.

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Can you lose money on a brokered CD?

It’s possible to lose money on a brokered CD if you sell it prior to maturity after interest rates have risen. Higher rates can cause the market price of brokered CDs to decline, meaning you could end up selling them for less than what you paid.

Are brokered CDs a good idea?

While it depends on your specific situation, a brokered CD might be a good idea if you understand the risks involved. Brokered certificates of deposit can offer the potential to earn higher interest rates than regular CDs. But it’s also possible to lose money with this type of CD. Be sure to weigh the pros and cons.

What is the difference between a brokered CD and a bank CD?

A brokered CD is issued by a bank and sold by a brokerage. Bank CDs are issued by banks and offered directly to their customers. Brokered CDs may have higher minimum deposit requirements and offer higher interest rates. They are also typically more flexible than bank CDs because you can sell them on the secondary market, while you are required to hold onto bank CDs for the full term or risk paying an early withdrawal penalty.

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