Certificates of deposit (CDs) are one of the safest ways to earn interest on your savings. Most people open CDs directly at their bank or credit union. But there’s another option many beginners don’t know about: brokered CDs.
Brokered CDs can offer higher rates and more choices but they also come with unique risks. If you’re thinking about using them, it’s important to understand how they work before investing.
What Is a Brokered CD?
A brokered CD is a certificate of deposit that you buy through a brokerage firm instead of directly from a bank.
The brokerage acts as a middleman. It connects you with banks across the country that are offering CDs. Instead of being limited to your local bank’s rates, you can choose from many different institutions all in one place.
Think of it like using a travel website. Instead of calling one airline, you compare dozens of flights at once. Brokered CDs work the same way, but for savings products.
How Brokered CDs Work
When you buy a brokered CD, here’s what happens:
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A bank issues a CD with a specific interest rate and term length.
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A brokerage firm offers that CD on its platform.
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You choose the CD and invest your money through the brokerage.
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The bank pays interest, and you receive the payments through your brokerage account.
CD terms can range from a few months to several years. In most cases, longer terms offer higher interest rates.
Real-life example
Imagine you have $10,000 to invest.
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Your local bank offers a 1-year CD paying 3.50% interest.
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But through a brokerage account, you find a CD from another bank paying 4.25%.
By using the broker, you earn more interest without having to open multiple bank accounts yourself.
Why Investors Choose Brokered CDs
Brokered CDs offer several advantages compared to traditional CDs.
1. Access to more banks and better rates
When you open a CD directly at a bank, you only see that bank’s rates.
With brokered CDs, you can compare rates from many banks nationwide. This competition often leads to higher interest rates.
This is especially helpful when local banks are offering low returns.
2. Convenience and flexibility
You can manage multiple CDs from different banks in one brokerage account. This makes it easier to track your investments.
Some investors build a “CD ladder” by buying CDs with different maturity dates, helping them earn steady income over time.
3. Ability to sell before maturity
Unlike traditional CDs, brokered CDs can sometimes be sold on the secondary market before they mature.
This gives you an exit option if you need your money early. However, this flexibility comes with risk (explained below).
Fees and costs to watch for
Brokered CDs don’t always have obvious fees, but you still pay indirectly.
Costs may include:
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A transaction fee when you buy the CD
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Brokerage service fees
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Lower interest rates if the broker takes a cut
Sometimes the fee is built into the interest rate, so it’s not always visible.
Always check the total return not just the advertised rate.
Key Risks of Brokered CDs
While brokered CDs are generally considered safe, they have some important risks that beginners need to understand.
1. You could lose money if you sell early
This is the biggest difference between traditional and brokered CDs.
If you keep a CD until maturity, you receive your full investment plus interest.
But if you sell early, the price depends on market conditions.
For example:
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You buy a CD paying 3% interest.
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Later, new CDs start paying 5%.
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Investors won’t want your lower-paying CD unless you sell it at a discount.
This means you could lose money.
2. Limited buyers in the resale market
Even if you want to sell your CD early, there may not be many buyers.
This can make it difficult to sell quickly or at a fair price.
3. Bank safety matters
Brokered CDs are typically insured by the Federal Deposit Insurance Corporation (FDIC), just like regular CDs, as long as the issuing bank is FDIC-insured and you stay within coverage limits.
However, you should always confirm:
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The bank is FDIC-insured
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Your total deposits stay within insurance limits
Never assume all CDs are equally safe.
4. Potential scams or misleading offers
Because brokered CDs involve intermediaries, it’s important to work with trusted, reputable brokerage firms.
Be cautious if:
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The rate seems unusually high
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You feel pressured to invest quickly
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The details are unclear
Always verify the broker and ask questions.
Brokered CDs vs. Traditional CDs
| Feature | Brokered CDs | Traditional CDs |
|---|---|---|
| Where you buy | Brokerage firm | Bank or credit union |
| Bank choices | Many banks | One bank only |
| Interest rates | Often higher | Usually lower |
| Early withdrawal | Sell on market (possible loss) | Fixed penalty fee |
| Convenience | Manage multiple CDs in one account | Separate accounts needed |
Are Brokered CDs Right for You?
Brokered CDs can be a good option if you:
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Want higher interest rates
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Are comfortable using a brokerage account
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Plan to hold the CD until maturity
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Want access to CDs from multiple banks
They may not be ideal if you:
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Might need your money early
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Prefer simplicity
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Don’t want market-related risks
Please take a look at this as well:
Are CDs Worth It? A Beginner-Friendly Guide to Deciding
