If you’re looking for the highest rate on a certificate of deposit (CD), you might have to look beyond your bank. For higher yields and much longer maturity periods — sometimes as long as 30 years or more — consider buying a brokered CD.
Just keep in mind that brokered CDs are more complex and risky than traditional CDs. On top of that, market conditions play a huge role in what’s available. When interest rates are high, as they are now, brokers tend to reduce their CD rates and shorten their terms.
How do brokered CDs work?
Like a traditional CD, a brokered CD can give you a fixed rate of interest on your cash deposit for a set period. Unlike traditional CDs, though, you have to purchase these accounts through brokerage firms, such as Vanguard or E-Trade, or from individual brokers. In either case, the broker buys the CDs in bulk from the bank and then sells them to you.
The main benefit of using brokered CDs is the potential to earn higher interest than regular CDs. You can also sell brokered CDs before they reach maturity without incurring a penalty.
However, brokered CDs are riskier than traditional CDs, in part because some brokers are not licensed or certified. Brokered CDs are also more complex and have more fees, so it’s easier to lose out on their full earning potential.
If you sell your brokered CD, for example, you might end up taking a loss since the market value of brokered CDs fluctuates. In addition, you pay a “markup” fee to the broker when you sell. At Fidelity, the markup is $19.95 at minimum. With Merril Lynch, it’s up to 2%.
While CD brokers tend to offer higher rates and longer terms than banks, market conditions can change what they offer. Currently, most brokerage firms offer up to 5.5% at best, and terms under 10 years, similar to traditional CDs. For brokered CDs with high yields and maturity above 10 years, the accounts are typically callable, meaning they’ll be terminated if interest rates drop.
How is interest calculated on brokered CDs?
Another problem with brokered CDs is that, unlike CDs issued directly from banks, they earn simple interest. That means your interest will always be calculated based on the original deposit amount. Instead of reinvesting your interest earnings into the CD, brokerages pay the money into a separate account (usually your cash account with the brokerage).
By contrast, traditional CDs earn compound interest on a daily or monthly basis, meaning your earnings are calculated based on a combination of your deposit and the interest you’ve already accrued. In other words, you’ll earn more than you would in a brokered CD with the same rate and term.
For example, if you invest $20,000 into a five-year CD at 5.5% APY, you’ll earn a total of $6,314 in interest if the account compounds interest monthly or $6,330 if it compounds daily. But with simple interest, you’ll earn just $5,500.
Where can I buy a brokered CD?
You can buy brokered CDs in one of two ways: through an SEC-registered brokerage firm or from an independent salesperson.
When you go through a trusted firm, such as Schwab or Edward Jones, your deposit is more likely to be FDIC-insured. But the SEC still recommends vetting any broker you might work with.
For brokers affiliated with investment firms, you can check their registration status and find out about their background through Investor.gov, FINRA’s Broker Check, and your state securities regulator. For unaffiliated brokers, search through your state’s consumer protection office.
Here’s what else you need to know up-front:
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Verify the bank: View written confirmation of which bank the funds will be deposited to and ensure they’ll be deposited to a CD account. If it’s a shared investment, make sure you can get a copy of the CD title.
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Confirm the insurance: Use BankFind Suite to confirm the issuing bank is FDIC-insured.
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Review the interest: Find out if the interest rate is fixed and for how long, and check into when you’ll be paid. Payment intervals are usually monthly, quarterly, or semi-annual.
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Understand the fees: Read through the Client Relationship Summary, which you can find on the broker’s website or by searching at Investor.gov. Review the account fees, including markup fees for selling. Check to see if broker fees and commissions are built into the price of the CD.
Determine if it’s callable: Find out if the account can be closed before maturity. You may have to read the fine print to find the details.
Are brokered CDs worth it?
When market rates are high, as they are now, it can be difficult to find brokered CD rates that beat traditional CDs. Even if the advertised interest rates on brokered CDs are slightly higher, you’ll have to accept broker fees and simple interest.
But if you can find a brokered CD with a competitive interest rate, and it’s from a reputable firm, the investment is worth considering. Just be sure to review all the details before you open an account, including where your money will be deposited and whether the account is callable.
Alternatives to a brokered CD
If you’re looking to maximize the interest on your cash deposits, a traditional CD could be a better option than a brokered CD. CDs issued directly by banks have a few features that can make them more valuable to you than brokered CDs, including:
Further, many traditional CDs now offer 5% APY or higher. If you want to earn more than that, you may have to adjust your risk tolerance and invest in stocks instead.