Brokered CDs are originally issued by a bank or credit union and then purchased through a brokerage firm or broker. They offer higher rates and more flexibility compared to a traditional CD. However, this isn’t to say brokered CDs are without risk. To minimize risk, consider the benefits and drawbacks of brokerage CDs before adding one to your retirement investment plan.
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Stephen Kates, CFP®
Certified Financial Planner™ Professional and Founder of Clocktower Financial Consulting
Stephen Kates is a Certified Financial Planner™ professional and personal finance expert with over a decade of experience working with individuals and families who need help with their finances. With experience as a financial advisor for two of the largest financial firms in the country, Stephen has worked with hundreds of clients to build comprehensive financial plans to grow and protect their wealth.Read More
- Published: March 21, 2023
- Updated: May 16, 2023
- 8 min read time
- This page features 6 Cited Research Articles
- Edited By
- You can purchase a brokered CD from a brokerage firm or broker.
- Brokered CDs offer higher rates compared to traditional bank CDs.
- There isn’t an early withdrawal penalty with a brokered CD. But there is a fee if you choose to sell your brokered CD on the secondary market.
- It may be risky to choose a brokered CD that is callable or not FDIC insured.
- Not all brokers are trustworthy. Verify the broker’s credentials before purchasing a brokered CD.
What Is a Brokered CD?
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.
It's important to understand what you are investing in when you purchase a brokered CD. The terms, maturity, risk factors and source of the investment are all vital to understand before placing your money with any company.
Advantages of a Brokered CD
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.
- High interest rates due to competitive environment
- Longer terms to lock in high rates
- Allows you to skip the early withdrawal penalty
- Better liquidity since they can be traded on the secondary market
- Ability to keep multiple CDs from different banks in one brokerage account
Disadvantages of a Brokered CD
There are four potential disadvantages to be aware of with brokered CDs.
- If the CD is callable, you could lose your high interest rate, along with future interest you could have earned.
- Your brokered CD could be uninsured if the original issuing bank or credit union isn’t FDIC or NCUA insured.
- If you need to sell your brokered CD on the secondary market, you may have to sell it for less than it was originally worth.
- Since deposit brokers aren’t approved by a federal agency, you could be purchasing a brokered CD from an unreputable source if you don’t do a background check.
“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.
Why Invest in Brokered CDs?
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.
Brokered CDs vs. Bank CDs
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.
|Brokered CD||Bank CD|
|Point of Purchase||A brokerage firm or broker||A bank (though you can also get a traditional CD from a credit union)|
|Average APY||Higher than a traditional CD||Higher than a savings account, but lower than a brokered CD|
|Typical Term Length Range||One month to 20 years||Three months to five years|
|Early Withdrawal Penalty||No||Yes|
|Risk Level||Moderate risk if the CD is callable or not insured||Little to no risk|
How To Invest in Brokered CDs
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.
- Open a brokerage account.
- Determine what features you want your brokered CD to have and how long you want the term length to be.
- Confirm how much the fee would be if you end up needing to sell your brokered CD on the secondary market.
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.
How To Minimize Risks with Brokered CDs
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.
Brokered CD FAQs
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6 Cited Research Articles
- Stapes, A. (2023, February 22). What Are Brokered CDs and Should You Get One? Retrieved from https://www.cnbc.com/select/what-are-brokered-cds/
- Mengle, R. (2023, February 2023). What Are the Income Tax Brackets for 2022 vs. 2023? Retrieved from https://www.kiplinger.com/taxes/tax-brackets/602222/income-tax-brackets
- U.S. Securities and Exchange Commission. (2023). Certificates of Deposit (CDs). Retrieved from https://www.investor.gov/introduction-investing/investing-basics/investment-products/certificates-deposit-cds
- Chase. (2023). Open a Chase Certificate of Deposit Account. Retrieved from https://www.chase.com/personal/savings/bank-cd
- Hicks, C. & et al. (2021, April 26). How to Open Your First Brokerage Account. Retrieved from https://money.usnews.com/investing/investing-101/articles/how-to-open-your-first-brokerage-account
- The Vanguard Group. (n.d.). Brokered CDs. Retrieved from https://investor.vanguard.com/investment-products/cds
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