While many American savers are familiar with bank CDs, most are unaware of brokered CDs, which pay higher yields, offer better liquidity, and the same protections as regular bank CDs. So what’s the catch and what’s the difference between the two? In a nutshell, brokered CDs are just bank CDs sold on brokerages, and like any other CD, they allow investors to earn a guaranteed rate of return over a set period.
What are Brokered CDs?
Brokered CDs are bank CDs sold by brokerage firms instead of directly by banks. On a single brokerage platform, investors can purchase CDs from a variety of banks, each with different rates rates and terms. This offers a tremendous degree of flexibility and options not frequently available with CDs issued directly by banks,
Some of the key differences between brokered CDs and bank CDs are:
- Brokered CDs typically offer higher interest rates than bank CDs. Brokered CDs are sold by brokerage firms who shop around for the best rates from multiple banks. In contrast, bank CD rates are based on whatever the banks want to pay you, and we know they’re not incentivized to pay you more than they need to.
- Brokered CDs offer more flexibility than bank CDs. Investors can sell their brokered CDs on the secondary market before they mature. Bank CDs are locked in until maturity unless you want to pay a hefty early withdrawal penalty.
- Both brokered and bank CDs are FDIC-insured up to $250,000, per depositor per bank. With brokered CDs, the FDIC insurance is covered by the issuing bank, so you can have more than $250,000 in FDIC coverage if you buy brokered CDs from different banks.
- Brokered CDs typically have higher minimum investment requirements than bank CDs, usually starting at $1,000. This means that they may not be accessible to all investors. However, some brokerages such as Fidelity have begun to offer fractional CDs with investments starting from as low as $100.
- Brokered CDs offer access to a wider range of terms and maturities than bank CDs. Investors have more options to match their cash needs and risk and return profiles.
Benefits of Brokered CDs
Brokered CDs Are More Liquid Than Bank CDs
Unlike traditional CDs, which typically require keeping your money locked in the savings account until maturity, brokered CDs offer enhanced liquidity. You can sell your brokerage CD on the secondary market anytime without facing early withdrawal penalties. Selling brokered CDs may incur a sales fee, but this flexibility can be advantageous for investors who need access to their funds sooner.
Higher Yield, More Terms and Longer Maturities Compared to Bank CDs
The primary benefit of brokered CDs is higher yields. Brokerages will also typically offer a wide range of brokered CDs with different rates and maturities. You can usually choose a brokered CD that has a term length ranging from three months to 20 years. On the other hand, bank CDs usually have a maturity between three to five years. For most investors, brokered CDs offer more flexibility to plan for emergency expenses.
Buying From a Brokerage Means Simpler CD Management
Because a brokerage allows for the convenience of purchasing CDs from multiple banks, it becomes easy to manage them all in a single brokerage account. Consolidating your CD management into a single brokerage eliminates the need to open accounts at different banks to access the highest CD yields.
Expanded FDIC Coverage
Brokered CDs are insured by the Federal Deposit Insurance Corp. (FDIC) for up to $250,000 per bank, per depositor. Purchasing brokered CDs from different federally insured banks and keeping them within a single brokerage account expand your FDIC coverage.
For example, if you have $500,000 to invest in CDs, you could purchase $250,000 in brokered CDs from Bank A and another $250,000 in brokered CDs from Bank B, both held within a single brokerage account. This would provide you with FDIC insurance coverage for the entire $500,000 investment, as each CD would be insured up to $250,000 by the FDIC.
Disadvantages of Brokered CDs
Brokered CDs Have Liquidity Risks
While brokered CDs are more liquid than bank CDs, the secondary market for brokered CDs isn’t always super liquid. If you need cash, you might sell your brokered CD at a loss. But if you plan on holding a brokered CD to maturity, there is no risk of losing your money as long as it isn’t callable.
Some Brokerage Charge Fees for Selling Brokered CDs
Although brokered CDs generally don’t have any early withdrawal fees or penalties, there may be charges associated with selling them. This will depend on your brokerage. The fees associated with selling brokered CDs can impact your overall earnings, so it’s best to hold CDs to maturity to avoid any unnecessary fees. If you plan on selling your brokered CD before maturity, understand whether your brokerage will charge fees for selling CDs so you can optimize your returns.
Some Brokered CDs Are Callable
Certain brokered CDs are callable, meaning the issuing bank can close the CD account before its maturity date. Callable CDs introduce additional complexity and uncertainty compared to non-callable CDs. We greatly prefer non-callable CDs for the peace of mind they offer. Non-callable CDs guarantee a fixed interest rate for the CD’s entire term and prohibit early account closure.
When to Consider a Brokered CD over a Bank CD
Generally, we believe brokered CDs offer distinct advantages over bank CDs. Consider the following:
- Brokered CDs offer higher yields. It’s rare to see a bank CD offering higher yields than brokered CDs. Some banks may offer an unusually high promotional rate that drops well below the CD rate after a few months.
- Brokered CDs have better liquidity than bank CDs if you need it. We try to shy away from liquidating brokered CDs due to fees associated with selling, but we’re comforted that we can at least liquidate brokered CDs without paying a serious penalty for early withdrawal.
- Brokered CDs offer more options and terms. If you want a ladder with long-duration CDs, it’s much easier to do with brokered CDs. Most bank CDs don’t offer terms over five years.
- Consolidating all our CDs into one brokerage firm allows for easy management. No more logging into 5 bank accounts where I’m juggling different promotional rates.
- Expanded FDIC coverage when buying CDs from multiple banks. Remember, the FDIC insurance limit of $250k applies to deposits per bank, per depositor. Two CDs in two different banks means FDIC coverage up to $500k.
When Bank CDs May Be Preferable
Maybe you’re not convinced that brokered CDs are better. That’s totally fine! Here are some scenarios when you might consider a bank CD over a brokered CD.
You’re Comfortable With Your Bank
Investors with a lower risk tolerance may find traditional bank CDs more appealing. Practically speaking, bank CDs and brokered CDs have the same level of risk. However, brokered CDs can be traded on the secondary market, so the actual price of the CD can fluctuate. If you hold the CD to maturity, it’s guaranteed that you’ll receive your original investment back. But if you can’t stomach the fact that your CD is changing in value, then a bank CD could be a better option for you. Having any type of CD is better than leaving your cash uninvested.
Bank CDs are Simple
Brokered CDs require some research. While it’s exciting to buy brokered CDs with higher rates, you need to research whether they’re callable and confirm whether the issuing bank is FDIC-insured. Most people have accounts at major banks, which offer straight CDs that require less research and effort. Just know this simplicity comes with a cost — they pay you less income!
How to Buy Brokered CDs
Purchasing brokered CDs involves a few essential steps. Here’s a guide to help you navigate the process effectively:
- Open a brokerage account: To buy brokered CDs, you first need to have an account at a brokerage firm or institution that offers these investment products. Research reputable brokerage firms that align with your investment goals and open an account with them.
- Select the desired terms and investment amount: Once you have a brokerage account, you can select the specific brokered CD term and investment amount. Consider your financial objectives, risk tolerance, and investment horizon when making these choices.
- Compare your brokered CD selection: When researching brokered CDs on a particular, you might want to compare the CD rates offered to other brokerages and banks. Sometimes, you might find a better deal elsewhere.
- Your brokerage may show you two types of brokerage CDs: “New issues” and “secondary trades”. New issue CDs mean that this is the first time these CDs are being offered for sale to investors. Secondary trades mean that these CDs are owned by another investor who wants to sell them. The minimum deposit for these types of CDs may be different depending on your brokerage.
- Research fees and minimums: Be mindful of any fees associated with buying and selling brokered CDs. Some brokerages may charge fees for transactions on the secondary market, while others may waive fees for purchasing newly issued CDs. Additionally, be aware of minimum investment requirements that may apply.
- Pay attention to whether your brokered CD is callable or non-callable: Callable CDs allow the issuer to close them before their maturity date. This is typically done when interest rates are declining, so the bank can issue a new CD at a lower rate. Non-callable CDs offer more stability, as the issuer must adhere to the agreed-upon terms until maturity. Certain brokered CDs may be callable.
Sound complicated? You can follow our step-by-step guides to buying brokered CDs on any platform.
Where to Find Brokered CDs
Brokered CDs are available through most major brokerage firms, including Charles Schwab, Vanguard, Merrill Edge, Merrill Lynch, and TD Ameritrade.
For example, Charles Schwab offers commission-free purchasing of new-issue CDs with a minimum investment of $1,000. Schwab will charge a transaction fee of $1 per CD for online trades on the secondary market. There is a minimum of $10 and a maximum of $250 per brokered CD trade. Broker-assisted transactions may incur a $25 per-trade service charge.
Vanguard is another popular option for CDs, which require a minimum investment of $1,000 and have terms ranging from one month to 20 years. Vanguard does not charge a commission for CDs, but there is a fee of $1 for every $1,000 invested, with a maximum fee of $250 for CDs sold on the secondary market.
Merrill Edge and Merrill Lynch brokered CDs are also popular for many looking to earn CD rates far higher than with a bank account.
Can You Lose Money in a Brokered CD?
If you hold a brokered CD until its maturity date, the bank will pay back the face value and the accumulated interest, and you won’t lose money. If you notice that your brokered CD has a fluctuating value, that’s because market interest rates are dynamic and will affect the market value of your brokered CD. However, you’ll receive your full investment back plus interest if you hold your brokered CD until maturity.
If you choose to sell a CD on the secondary market and its value is lower than its face value, you may still lose money or incur a loss. Additionally, your broker may charge a fee when you sell a brokered CD.
Brokered CDs Offer Unique Advantages
In conclusion, investing with brokered CDs is one of the primary ways to generate more income from cash. The liquidity, varied terms, convenience, and potential for higher rates make them an appealing investment option for many individuals.
If you’re interested in investments beyond CDs, there are many other cash investments to consider. For example, money market funds are extremely safe and liquid mutual funds that are often used as alternatives to cash. They hold Treasury bills, which can also be bought directly from brokerages. One of our favorite investments is the ultra short-term ETFs a new type of cash ETF that holds T-Bills and floating rate notes. We recommend reviewing all cash options on your brokerage to see what’s right for you.
