Brokered CDs

A brokered CD is originally issued by a bank or credit union, then purchased in bulk by a brokerage firm or broker to resell. Brokerage firms and brokers can negotiate higher interest rates with issuers due to the competitive environment, according to the U.S. Securities and Exchange Commission.

Since brokered CDs have higher interest rates than traditional bank CDs, they can be a great investment product to boost your retirement savings. They also offer flexibility to skip the early withdrawal penalty by allowing you to sell or trade your brokered CD on the secondary market before it matures. Note that if you choose to buy a brokered CD on the secondary market, you’ll likely pay a broker fee.

Just like traditional CDs, brokered CDs offer fixed interest rates for a set term, providing retirees with guaranteed returns.

Brokered CDs are generally safe investments, as long as you confirm the original issuer is FDIC or NCUA insured. Learning about the advantages and disadvantages of brokered CDs can help you decide if it fits within your retirement plan.

The main advantage of brokered CDs is their high interest rate. For example, Chase offers a two-year traditional CD with 2.00% APY. On the other hand, a two-year brokered CD from The Vanguard Group offers 5.00% APY. Each CD matures at the same time, yet a brokered CD offers a far more competitive rate.

Another noteworthy feature is their term lengths. Traditional banks that issue CDs have common term lengths of three months to five years. Brokered CDs can offer terms lengths ranging between one month to 20 years, according to CNBC. This will allow you to lock in high rates to combat inflation for years to come.

There are other advantages of brokered CDs to consider.

There are four potential disadvantages to be aware of with brokered CDs.

“One key thing to be mindful of with brokerage CDs is that some may be callable. This means that the bank issuing them can call them back and pay you back your money early. This can be problematic for the retiree or investor,” Cameron Valadez, CFP®, CPFA, AWMA®, the Co-Founder of Planable Wealth told RetireGuide.

You can avoid this issue by confirming whether your brokered CD is callable before opening one. Note that most callable brokered CDs will have higher interest rates compared to non-callable brokered CDs. This is because of the heightened risk.

To avoid having an uninsured CD, ask your broker if the issuing bank is FDIC insured. If the issuer is a credit union, then ask if it’s NCUA insured. If they are, your brokered CD will be insured up to $250,000.

If rates have lowered since when you originally opened your brokered CD, you would end up getting less than what you paid if you sold it on the secondary market. This, on top of the fee you’d have to pay your broker, may not make sense for building your retirement savings.

According to the U.S. Securities and Exchange Commission, deposit brokers are not licensed or certified, and no federal agency approves them. Generally, anyone can become a broker. You can confirm their disciplinary history and if they’re from a reputable institution using SEC’s and FINRA’s online databases.

Investing in brokered CDs can help bulk your retirement savings with their unique features. Brokered CDs are a flexible, liquid and potentially FDIC-insured savings vehicle with high interest rates.

As we continue to face high inflation in 2023, the ability to avoid early withdrawal penalties with brokered CDs can be appealing. You never know when you may need access to your money, and brokered CDs avoid the risk of a penalty on your hard-earned interest.

You also have access to a wide range of issuers with brokered CDs. Your broker can hand-select brokered CDs with the highest rates to keep in your account.

Compared to other investments, like stocks or cryptocurrency, brokered CDs are considered very safe as long as you choose a trustworthy broker. However, keep in mind that brokered CDs are still considered higher risk compared to a traditional bank CD.

If you want a longer term, riskier CD with higher rates — investing in a brokered CD could be the next best move for your retirement plan. If you want a safer alternative with lower rates — you could consider adding a traditional bank CD to your portfolio instead.

Compare brokered CDs and bank CDs before opening an account to make a well-informed financial decision.

To invest in a brokered CD, you’ll need to open a brokerage account. You can set up a brokerage account through a brokerage firm. Some brokerage accounts require a minimum deposit for your CD.

You can typically open your brokerage account online, and then use a broker to help you find the best CD that fits your retirement needs.

Make sure you keep track of your brokered CD’s maturity date. If you don’t liquidate your brokered CD once its matured, it could be automatically be reinvested at a lower rate.

You can minimize risk with brokered CDs by diversifying your investment portfolio, laddering your CDs and confirming the creditworthiness of the issuer. It would also be in your best interest to avoid callable or noninsured brokered CDs.

A diversified portfolio is a key element to a well-rounded retirement plan. You could pair a higher risk callable brokered CD with a safer investment vehicle, like a treasury bond. Consider setting up backup plans in case any of your investments fall through.

You could also build a CD ladder with brokered CDs to minimize risk. For example, instead of buying one five-year brokered CD, you could purchase various brokered CDs, including a six-month, one-year, three-year and five-year CD. This way, you have steady access to your funds as each CD matures.

If your broker isn’t trustworthy, they could loop you into a brokered CD with high interest rates but poor features. For example, some brokers may lure you in with high rates, but the brokered CD may be callable. Make sure you verify your broker’s background or if the brokerage firm they’re employed by has any history of complaints or fraud.