What Is a Brokered CD?

A certificate of deposit, or CD, offers a safe and secure way to save money that you may not need to use right away. CDs can offer a guaranteed rate of return on your money, in exchange for leaving those savings in the CD until it matures. A brokered CD is a savings option you may see offered through your brokerage. These CDs share some similarities with the CDs you may find at your bank or credit union. But some things set brokered CDs apart from the crowd.

Finding a financial advisor to help you make the right choices with your finances can be well worth it, especially if you’d rather not manage it on your own.

What Is a Brokered CD?

A brokered CD is a certificate of deposit that’s offered through a brokerage but issued by a bank. Since they’re issued by a bank, brokered CDs can be FDIC-insured just like other CDs. The standard insurance coverage limit of up to $250,000 per depositor, per account ownership type, per financial institution, applies. That protection is available to you if your brokerage partners with an FDIC-insured bank.

Brokered CDs can earn interest just like other CDs. This can be a fixed interest rate that applies for the entire CD term, but you may earn a higher yield from a brokered CD than you would a regular CD. Aside from potentially offering a higher interest rate to savers, brokered CDs are different from other CDs in one important way: they can be traded on the secondary market.

How Brokered CDs Work

Brokered CDs are certificates of deposit issued by banks but sold through brokerage firms instead of directly to consumers. They work similarly to traditional CDs by offering a fixed interest rate for a set term, but they provide more flexibility because they can be bought and sold on the secondary market before maturity.

When you buy a brokered CD, it is held in your brokerage account, and interest payments are credited automatically. Unlike bank CDs, which usually require you to keep the money locked in until maturity, brokered CDs can be sold early, though their value may fluctuate based on interest rate changes.

Some brokered CDs are callable, meaning the issuing bank can redeem them before the maturity date, potentially cutting short your expected interest earnings. FDIC insurance still applies, but only up to the standard limits per depositor per bank, so it’s important to monitor your total insured balance if purchasing multiple brokered CDs from different banks.

Pros of Brokered CDs

Saving money in brokered CDs can offer some advantages over saving on a regular CD. Here are the main advantages that everyone should understand before investing.

Flexibility: Since you can sell brokered CDs on the secondary market at any time and you’re not bound by a set maturity date, they’re a more flexible savings option than regular CDs. That might be important to you if you’re looking for a higher-yield savings option that still allows you to keep your money relatively liquid.
Accessibility: Another advantage of brokered CDs is that you don’t have to necessarily open multiple bank accounts to own them. Instead, you can open just one brokerage account and hold multiple brokered CDs issued by different banks inside it. That can work in your favor if you want to own a mix of CDs with different terms and annual percentage yields.
CD terms: Standard CD terms often range from as little as 30 days to up to five years, though some banks will extend that even longer. Brokered CDs can let you take advantage of a wider variety of CD terms, which could be useful if you want to build a CD ladder.
Rates: As mentioned previously, you may be able to get better rates with a brokered CD versus a regular CD. That could be significant if you’re investing in CDs in an otherwise low-interest-rate environment when banks are slashing rates on deposit accounts.

Cons of Brokered CDs

While a brokered CD account can have its upsides, there are a few drawbacks to consider that may deter you from wanting to put your money into one.

Loss potential: Being able to sell a brokered CD at any time may sound appealing, but it’s important to get the timing right. If you sell your CD at the wrong time, it’s possible that you could lose money if the sale price ends up being less than what you paid. Additionally, some brokered CDs are callable, which means if it’s called before the maturity date you’ll miss out on a chance to earn interest.
Sales fees: While you won’t pay an early withdrawal penalty for selling a brokered CD before it matures, that doesn’t mean those transactions are fee-free. You could still be charged a transaction fee for the sale, which can erode your interest earnings.

If you’re not sure whether a brokered CD is right for your portfolio, consider working with a financial advisor.

How to Buy Brokered CDs

If you’re interested in adding a brokered CD or two to your portfolio, there are a few things to know about buying them. First, you’ll need to open a brokerage account with a firm that offers brokered CDs if you don’t already have one. When comparing online brokerage accounts, pay attention to the fees they charge as well as the account types and investment options they offer.

Once your brokerage account is open, the next step is deciding which brokered CDs you want to buy. Here, you’ll want to look at things like:

Minimum deposit requirements
Interest rates
Sales fee if you decide to sell before maturity
Whether the CD is callable or not

If a brokered CD is callable, the bank that issued it may end the CD before it reaches its maturity date. This can happen if interest rates are declining. If you have a callable brokered CD, then it’s possible that you may not get the benefit of earning interest for the full maturity period. Also, check to see if the brokered CDs you’re buying are FDIC-insured. Not all of them are, so it’s important to know whether your money is protected.

Bottom Line

A brokered CD could be a good addition to your investment portfolio if you’re looking for a way to diversify while earning interest. It’s important to understand how these CDs work, in terms of selling them on the secondary market and when it makes sense to do so. Keep in mind that you aren’t limited to either brokered CDs or regular CDs; you could hold a mixture of both as part of a well-rounded investment strategy.

Tips for Investing

Consider talking to a financial advisor about whether purchasing brokered CDs is a good option. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals get started now.
In addition to brokered CDs, consider what other types of CDs may be a good fit. IRA CDs, for example, combine the benefits of bank-issued CDs with Individual Retirement Accounts. You can use them as a safe way to invest for retirement while still enjoying IRA tax benefits.
Creating a CD ladder can help you take advantage of differences in interest rates and maturity terms for regular CDs. With a CD ladder, you own multiple CDs with varying terms and rates. As a CD matures, you can decide whether to roll it into a new CD or withdraw your savings and interest.