What Is a Brokered CD, and Is It Right for You?

Certificates of deposit (CDs) are a great option if you’re looking for a secure place to stash your savings for a set period of time, whether for a big goal like retirement or to park your emergency fund. When exploring your options, one type of CD you may come across is a brokered CD.

Unlike a traditional bank CD from a bank or credit union, you buy a brokered CD from an individual broker or a brokerage firm, such as Vanguard or Fidelity Investments. Interest rates on brokered CDs may be higher than those for traditional CDs, but brokered CDs can also carry more risk.

Understanding these and other differences is key to determining whether brokered CDs can help or hinder you from reaching your financial goals.

What is a brokered CD?

A brokered CD is a certificate of deposit that you buy through a broker or brokerage firm rather than a bank.

Banks issue these CDs in bulk to brokerage and investment firms, which then offer them to their customers. Still, you enjoy the same FDIC insurance protection with brokered CDs as bank-issued CDs — up to $250,000 per account owner, per issuer.

To purchase a brokered CD, you will need a brokerage account. When you buy one, you’ll choose a term and make an upfront deposit, usually around $1,000 or more.

The brokerage firm doesn’t compound interest like a bank does on CDs. Instead, it usually pays you a fixed interest rate at regular intervals, such as every month or quarter. You get your principal back at the end of the CD's term.

If you need your principal before the CD matures, you can sell your brokered CD at any time on the secondary market. You typically won’t pay an early withdrawal penalty as you would with a traditional CD.

Another benefit of brokered CDs is that they may offer stronger interest rates compared to CD rates you get at a bank — though that’s not always the case.

Brokered CD vs. bank CD

Bank CDs have a lot in common with brokered CDs. With both types of accounts, you earn interest throughout a specified term and get deposit insurance on your funds, which protects you up to a certain amount against bank failure.

That said, the following key differences set brokered CDs vs. bank CDs apart:

Purchase: Brokers and brokerage firms offer brokered CDs, while banks and credit unions sell bank CDs.

Interest rates: Brokered CDs may offer higher interest rates than traditional CDs because brokerage firms buy these CDs in bulk. As such, banks are willing to pay these firms higher interest rates on brokered CDs, and the brokerages may pass those rates to you. However, unlike the compound interest you earn with bank CDs, you typically earn simple interest with a brokered CD.

Terms: Often, brokered CDs offer longer terms than bank CDs, allowing you to lock in a rate for a longer time. Terms for brokered CDs can range from six months to 30 years, while typical terms for bank CDs range from three months to five years.

Costs: Brokerages also may pass on their costs to you. They pay a ticket charge to buy CDs from banks and credit unions, and you may wind up covering that amount. Or, the brokerage may charge account maintenance fees to cover overhead costs. However, it's possible to get helpful services in return for these fees. For instance, brokerages may research a wide range of CDs, provide options from multiple banks and shop around for competitive rates. They also may help you renew your CDs and set up a CD ladder.

Risks: Some brokered CDs are “callable,” which means the issuer can redeem, or call back, the CD for the full amount before it matures. If this were to happen, you would still get back all of your principal plus the interest earned up to that point. But you'd miss out on the interest you would have earned by keeping the account until maturity.

Early withdrawal: Another difference between brokered CDs vs. bank CDs is what happens when you withdraw your funds early. With a bank CD, you’d typically pay an early withdrawal penalty for tapping the account before maturity. With a brokered CD, however, you can access your funds without a penalty by selling the CD in the secondary market.

Even with this option, however, it's possible to lose some of your investment in a brokered CD if the market price has changed between the time you opened the account and sold the CD on the secondary market. Generally, you can expect to lose money if market rates rise, as there will be less demand for a brokered CD that may have a lower rate. On the other hand, you can earn a profit if market rates fall, as your brokered CD's rate may be more competitive.

Brokered CD pros and cons

Pros:

• Brokered CDs come with FDIC insurance.
• You can sell a brokered CD at any time with no penalty.
• The brokerage handles account maintenance.
• Brokered CDs can have longer terms, sometimes up to 30 years.

Cons:

• You may lose your money if market rates have gone up when you sell a brokered CD before maturity.
• Brokered CDs may come with account maintenance fees.
• If it’s a callable CD, the brokerage can redeem the account before it matures.
• Unlike traditional CDs, brokered CDs don't compound interest.

Alternatives to brokered CDs

If you’re not sure a brokered CD is the right choice, you have other options for parking your cash. Here are a few alternatives to check out:

• Bank CD: A CD from a bank or credit union isn’t at risk of losing value. Instead, you’re guaranteed to get your principal back plus interest as long as you keep the funds in the account for the stated term.
• Dividend-paying stocks: These stocks may be a good option if you want to receive dividends on a regular basis. You may earn a yield higher than CDs, but you risk losing your principal, too.
• Savings accounts: A high-yield savings account pays a much higher interest rate than standard savings accounts. These accounts allow you to deposit money continually, and you can make multiple withdrawals each month, offering easier access to your money than a CD.

Is a brokered CD right for you?

Brokered CDs are not inherently better than bank CDs, and vice versa. Instead, whether a brokered CD is right for you depends on your goals and financial needs.

Brokered CDs can offer greater flexibility and higher interest rates than traditional CDs, but they can also come with more complexities and risks. Brokered CDs can be worth exploring if you’re looking to invest in several CDs, as you can open them through a single brokerage account and still get FDIC coverage.

Just make sure you're mindful of the differences between brokered CDs vs. bank CDs and understand what you're getting into before buying a brokered CD.