Brokered CDs: How They Work

Brokered CDs are provided through brokerages and issued by banks. They're like regular CDs, but you can trade them.
Jan 13, 2022
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What is a brokered CD?

A brokered certificate of deposit is like a standard CD that is offered by a brokerage instead of a bank. A CD, whether at a bank or brokerage, is a type of savings account that requires an upfront deposit for a fixed period at a fixed rate.

Brokered CDs, specifically, are CDs provided through brokerages and issued by banks. Like regular CDs, they’re federally insured in case of a bank failure and can contribute to stable returns. But they differ from bank CDs in several ways. Here’s what to know.

Brokered vs. bank CD: 2 big differences

1. Brokered CDs can be traded on a secondary market. With a bank CD, to withdraw money before a term ends, you typically must pay a penalty. But with a brokered CD, to withdraw money early, you have to sell the CD. There’s no penalty for doing so, but selling involves some risk, since a CD may lose value when sold. This is especially true when interest rates for new CDs are on the rise, generally because there will be less buyer demand for the CD you bought at a lower rate (with less return) than newer CDs with higher rates (and more return).

"People don’t generally trade CDs as much as they use them as a conservative allocation of their [investment] portfolios that will ideally exceed the pace of inflation,” says Michael Kealy, senior manager of product management/marketing at the brokerage firm TD Ameritrade.

2. Brokered CDs generally send out interest payments at a regular frequency, such as monthly or semiannually (or at maturity, depending on the CD term and brokerage), and interest isn’t compounded as it is with bank CDs. This can be a disadvantage since you must reinvest the interest yourself, Kealy says.

When to consider brokered CDs over bank CDs

You have a brokerage account and want CDs from different banks in one account. Popular brokerage firms offer CDs from many banks, so you’re able to compare and select rates from a wider variety of CDs than one bank provides.

You want longer terms than bank CDs typically offer. Brokered CDs can have terms of up to 20 or 30 years, depending on the brokerage and the rate environment, while bank CD terms generally go up to five years. This availability of longer terms can be handy for locking in a rate before rates drop. On the flip side, being locked into rates in a rising-rate environment can mean missing out on higher rates.

You need FDIC insurance beyond one bank’s limit. A bank CD has federal insurance of up to $250,000 per customer at an insured bank, but a brokerage account can hold CDs from multiple banks. This makes it easy to protect amounts that go beyond one bank’s FDIC limit.

» Want an easy way to compare? See our list of best CD rates this month

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Marcus by Goldman Sachs High-Yield CD

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APY

1.30%

Term

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2.25%

Term

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When to consider bank CDs over brokered CDs

You want a simpler way to earn interest. Taking out a bank CD is a similar process to opening a regular savings account; buying brokered CDs is more complex. Some of the terms you’ll find when buying CDs on online brokerage platforms, such as “call protection,” “coupon,” “bid” and “ask,” may be unfamiliar to those who haven’t traded investments before.

You want interest to compound automatically. With brokered CDs, you have to reinvest interest in a different account to compound interest.

You prefer an easier way to access CD funds early, if necessary. A bank CD typically has an early withdrawal penalty, which can be several months’ worth of interest, and you can decide if that fee is worth getting the money out before the term’s maturity. With a brokered CD, the only way to get money out is by selling. And brokered CDs are like bonds in that when they’re being traded, their value can change based on the interest-rate environment — so you could lose money. Plus, some brokerages tack on a trading fee when you sell CDs. (Want a savings account that's easier to access than bank and brokered CDs? See our list of the best high-interest savings accounts.)

» Get a closer look at bank CDs vs. bonds

Buying a brokered CD: the details

Brokerages let you buy them in two ways: as new issues and from the secondary market. New-issue CDs are what the brokerage offers to you directly in its listing of CDs from various banks. They’re CDs available to buy for the first time. Issues in the secondary market are from people selling their brokered CDs. Many popular brokerages offer an online platform for buying CDs.

To buy these CDs, you need a brokerage account. This is the container for the financial products you have at a brokerage, including any stocks, bonds, CDs and other assets. (Learn more in our guide to brokerage accounts.)

Minimum deposits: Brokerages generally set a minimum investment amount for a brokered CD, such as $1,000, as well as minimum increments. For example, you might only be able to put money into a CD in $1,000 increments.

Fees: Like bank CDs, brokered CDs don’t have monthly fees, and if you’re getting a new issue, there’s generally no upfront cost. However, a brokerage might add a fee for trading CDs on the secondary market, and the brokerage account might have its own costs (see common fees).

Callable vs. noncallable CDs: With a “callable” CD, the issuing bank may end — or “call” — the CD before its maturity date, which it might do if interest rates are dropping. You get back the original deposit and the interest you earned up to that point. In exchange, callable CD rates tend to be higher than noncallable rates. If you want to ensure you get the full return you’re expecting, noncallable CDs are a safer bet.

» Are your funds diversified? Having money across different assets such as stocks and bonds in a brokerage account can reduce risk and boost returns. Learn more about asset allocation.

Compare at a glance: brokered vs. bank CDs

Brokered CD

Bank CD (or Traditional CD)

Issuer

Bank or credit union.

Bank or credit union.

Where you get it

Brokerage firm.

Bank or credit union.

Typical terms

1 month to 20 years.

3 months to 5 years.

Rate of return

Currently 0.10%-2%.

Best CD rates are 0.50%-1.20% APY.

When do I typically receive interest?

In regular installments, such as monthly or semiannually, until the brokered CD matures; or at maturity, depending on the brokerage policy and CD term.

Once the CD matures. This lets you take advantage of compound interest. (See what you could earn with our CD calculator.) Depending on the bank, you could receive regular interest payments instead.

Consequences of accessing funds

There’s potential risk of losing value if you're selling brokered CDs instead of waiting for them to mature.

An early withdrawal penalty tends to be several months' worth of interest, or more. (Learn about the exception: no-penalty CDs.)

Money protected?

Yes, each brokered CD has FDIC insurance from the issuing bank, as long as a brokerage firm partners with banks (and credit unions) that are all federally insured.

Yes, CDs have federal insurance of up to $250,000 per customer at an insured bank (see more on FDIC insurance).

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