What Are Brokered CDs in Banking?
The Basics of Brokered CDs
Brokered CDs are simply CDs offered by a financial intermediary. It’s important that you understand how to buy brokered CDs, how you’re paying for them, and what to watch out for. Let’s cover some fast facts about brokered CDs.
Brokered CDs, as the name suggests, are brokered. This means that a person (your financial advisor for example) surveys the marketplace to find the best CD rates available. Like other CDs, you agree to keep your money deposited for a specified term, and a bank agrees to pay you a certain amount of interest.
Unique Features of Brokered CDs
You’ll find a few things that are unique to brokered CDs. First, you open up your investment choices to a wide universe of banks. Contrast this with a situation where you walk into a bank and ask about CDs – they’re only offering their own CDs. If you use brokered CDs you’ll likely be exposed to CDs from a variety of locations. Sometimes this can work to your advantage if your local banks are trying not to take in more deposits and are therefore keeping rates slightly low.
You actually buy and sell brokered CDs much like other fixed-income investments. There is typically a limited supply, and there may be a minimum required order size (such as $10,000). You can even trade brokered CDs in the secondary market – although there is not much volume.
Where to Find Brokered CDs
Financial advisors, brokers, financial planners, and financial consultants may offer brokered CDs. Simply put, any person who can shop around for securities can probably find you a brokered CD. Ask your financial advisor if you want to look into brokered CDs.
Costs Associated With Brokered CDs
Typically your “cost” comes out in the Annual Percentage Yield (APY) that you earn on your money. This is similar to a bank – the bank doesn’t usually charge you a fee to invest in a CD. However, the bank could pay you more or less depending on profitability concerns. The same is true for brokered CDs – your APY depends on how much any intermediaries want to earn on the deal.
Some intermediaries (like your broker or financial advisor) may charge you a modest fee to buy brokered CDs. This may be a ticket-charge that they have to pay for placing your order, and will likely be a flat fee or fee per thousand dollars invested.
Finally, you may be paying a fee under another arrangement, perhaps based on assets-under-management (or a flat financial-planning fee). Perhaps the cost is worth it to you because the CD broker does all your rate shopping, research, and renewals for you.
Risks Associated With Brokered CDs
A major risk of brokered CDs is market risk. This is the risk that you’ll sell your CD on the secondary market for less than you paid. Ideally, you’ll keep your CDs until maturity and eliminate this risk. However, life is uncertain and sometimes we need a change of plans. CDs can act like bonds – if interest rates rise, buyers in the secondary market may not want to pay face value to help you get out.
Another risk of brokered CDs is the risk that you’ll actually lose your money. You should make sure that any issuing banks are safe and FDIC-insured. You can find attractive CD rates that are much higher than the competition, but the tradeoff is that you need to assume more risk. For most CD buyers, the idea is to avoid risk. Make sure you’re careful which banks you do business with. There are plenty of good ones out there that want your business; you just have to do some homework.