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Certificates of Deposit (CDs) have long been a popular choice for savers seeking a secure investment for their cash, but with a higher interest rate than a checking or savings account. While traditional bank-issued CDs have been a go-to option, brokered CDs have gained increasing popularity among investors looking for greater diversity and potentially higher returns within their fixed-income portfolios. In this article and video, we look into the the distinct advantages and drawbacks of brokered CDs and traditional bank CDs.
First, the interest rates on brokered CDs are generally much more competitive. CDs available at your brokerage are sourced from banks across the country, and allow you to very easily shop CD rates from banks everywhere. It is highly unlikely that your local bank is offering the best rates in the country, so almost everyone can see an increase in the rates available to them by looing at brokered CDs.
Next, brokered CDs are much easier to administer. Opening accounts at local banks means making trips across town, opening multiple accounts, and perhaps having to open accounts at multiple different banks to stay within the FDIC protection limit. Brokered CDs can be purchased in your current IRA, Roth IRA, or brokerage account – There’s no need to open up new accounts all over the place.
And, you can very easily just purchase CDs from different banks within your one brokerage account and keep everything under FDIC protection.
Lastly, brokered CDs generally have much less fees to break, or get your money back early, if needed. Banks will typically charge 3 months of interest as an early redemption penalty. For a $100,000 CD with 5% interest, this could mean $1,250 in penalties!
Brokered CDs typically have a fee of $1 per $1,000 in value, with a maximum fee of $250. Check these fees with your broker before purchasing.
However, there are risks associated with brokered CDs. And one is related to needing to sell before maturity. If you need to get your money back from a brokered CD, you must find someone willing to buy it. Your broker will help you do this, but it may not be instantaneous and you may have to sell it for less than you originally paid for the CD.
You can lose principal in brokered CDs if you need to sell early.
If interest rates have risen from the time you originally purchased the CD to when you are looking to sell, you may lose principal on the sale. Likewise, if interest rates have declined, you could end up with an added profit.
Lastly, some brokered CDs are callable, which just means the bank can buy back your CD. Be sure to look for non-callable CDs if you want to be sure you are locking in your interest rate for the life of your CD.