A certificate of deposit, whether taken out directly from a bank or through a brokerage, is a type of savings account that locks funds for a set number of months or years. In exchange, the money is guaranteed to earn interest based on a fixed rate that’s generally higher than rates on brick-and-mortar banks’ regular savings accounts. CDs have federal insurance, which protects funds in case a bank fails.
Brokered CDs, specifically, are certificates of deposit provided through brokerages and issued by banks. Like regular CDs, they’re federally insured, making them a safe way to earn fixed returns on part of one’s savings. But they differ from regular CDs in some important ways. Here’s what to know.
What is a brokered CD?
Brokered CDs mainly differ from bank CDs in that they 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, you must sell it. 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 are on the rise.
“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, education coach at brokerage firm TD Ameritrade.
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, while bank CD terms generally go up to five years. This 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
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 “coupon price,” “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 in order 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.
» Get a closer look at how bank CDs and bonds differ
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, while 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 on our guide to brokerage accounts.)
Minimum deposits: Brokerages generally set a minimum investment amount for a brokered CD, such as $1,000 or $10,000, 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 tack on 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 2%-3%.||Best CD rates are 2%-3% 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 in losing value if you're selling brokered CDs instead of waiting for them to mature.||An early withdrawal penalty tends to be 3 to 6 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).|