When brokered CDs are the right move
Brokerage firms used to dangle enticing rates to attract investors to their new services.
Now, yields on brokered CDs look similar to the average bank yields.
If getting the highest rates possible is important to you, you're probably better off looking elsewhere. But if convenience is more appealing, brokered CDs are an option to consider.
Because brokers buy certificates from financial institutions and divide them up for resale to their investors, what you buy from a broker looks a lot like a traditional CD in many respects:
- They are FDIC-insured for up to $250,000 per person.
- They earn a set rate and you get your original investment, plus interest, at maturity.
- There are no fees or commissions.
If you're OK with sticking close to average rates, they offer some advantages:
Convenience. For people who view certificate purchases as a side note rather than the centerpiece of an investment strategy, the convenience of one-stop shopping is a big plus.
Early withdrawal. You can sell them before maturity without penalty. While many banks charge a penalty if you want to remove money early, brokerage firms will try to resell your CD without any cost to you.
There are also some disadvantages:
Better yields elsewhere. You can do better at a bank if you shop around. Find the best CD rates from scores of banks in our database.
Nothing is free. Selling early may cost you. Although you won't be charged commissions or penalties, you may not get back what you paid in because you're selling it on a secondary market.
If interest rates go up after your purchase, you'll likely have to sell at a discount because your certificate doesn't pay as much as current ones do. If interest rates have fallen since your purchase, you're likely to get a premium.
The amount you receive will depend on a number of factors, including how much interest rates have increased or decreased since your purchase and the time left until maturity. Like bonds, longer-term certificates will experience more price fluctuations than those maturing in a year or less.
Middle-man deal. You don't deal directly with the bank. Brokered CDs are usually registered in the name of the broker or its affiliate bank, which means customers need to contact the firm with any questions or concerns.
And if the issuing bank goes belly up, as several did in 2008, the brokerage firm will be in charge of getting your money back.
You can check out the financial strength of banks using the Safe & Sound rating system from Bankrate.com.
FDIC insurance limits. If you buy a CD issued from a bank where you already have deposits, the FDIC determines your insurance limit by adding together the accounts you opened directly at the bank and those opened by the brokerage firm or other agent.