Brokered certificates of deposit (CDs) are CDs that are issued by banks, then purchased by brokerages and reissued. Your financial advisor, through whom you purchase securities, can typically also sell you brokered CDs. Many people are attracted to brokered CDs because they can provide higher interest rates. But you should know some general facts about brokered CDs.
How do brokered CDs work?
Like regular CDs, you purchase a brokered CD and agree to leave your money deposited at the bank for a certain length of time, and the bank agrees to provide a certain rate of interest. Brokered CDs can offer higher rates because your brokerage firm surveys the marketplace to find the best CD rates.
If you buy a CD from your local bank, you pay the interest rates offered by the bank (although if you have a large amount deposited there they may offer a slightly higher rate). With brokered CDs your investment selection includes a much wider selection of banks.
Brokered CDs allow you to diversify your investments among a range of different banks. You have more flexibility to choose not only the highest interest rates but also the terms and maturities that best suit you.
There is typically a limited supply of brokered CDs, and you might be required to place a minimum order such as $10,000. You can purchase a brokered CD like any other fixed-income investment. You can even sell a brokered CD on the market, although there is small demand. If interest rates have risen since you purchased the CD, you may lose some of your principal.
There are some drawbacks to brokered CDs that you need to be aware of.
Brokered CDs often come with higher costs. Because with brokered CDs, the brokerage typically charges fees for the services it provides. The brokerage acts as the intermediary and takes care of the rate shopping for you. It also keeps track of when your CDs mature and may even take care of the renewal if requested.
The brokerage may charge a sales fee when you buy brokered CDs. This fee can be as high as 0.5% per CD. Or the fee may be rolled in to the other fees charged by the brokerage.
With brokered CDs there is also a risk you might lose your money. The bank may not be financially solvent and FDIC-insured. You might find higher CD rates than at your local bank, but the higher rates often come with higher risk.
Brokered CDs are often issued by banks that need to raise funds. Some are even issued by banks in foreign countries.Banks and other companies with lower financial ratings must offer higher rates to attract investment.
You will want to investigate the bank that issued the CD before investing. It is up to you, not the brokerage, to verify the safety of a brokerage CD. This is another reason to diversify your CD investments among different banks.
Brokered CDs have more complex terms than regular CDs from your bank. For instance, unlike most CDs from your local bank, brokered CDs can be called, or pulled back, by the issuer up to a year after they are sold. So you may not be assured of getting the interest rate you expected, if the bank calls back the CD.
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