A bank CD (certificate of deposit) is a fixed-rate deposit account that comes with varying terms usually from a few months to 5 years. These accounts provide guaranteed interest and funds must be kept untouched in the account until maturity or they may be subject to an early withdrawal fee.
Bank CDs are federally insured by the FDIC (for banks) and the NCUA (for credit unions) to protect your funds in the event the institution fails while your deposit is active.
Brokered CDs are certificates of deposit that are sold through brokerage firms but are still issued by banks or credit unions.
Because their origination is still from a bank or credit union, they come with FDIC or NCUA insurance and offer guaranteed interest for a fixed period of time.
Despite their similarities, there are a few key differences that one should take into account when considering a brokered CD vs a standard CD at a bank or credit union.
Continue reading our review below to understand the differences and pros and cons of each.
What is a Brokered CD and How to Obtain One
Most major brokerage firms offer brokered CDs. Fidelity, Charles Schwab and Edward Jones all offer these products and we follow them closely and publish their rates.
Through any of these major brokerages you can either purchase new issue CDs, which are newly issued from the bank or credit union (hence the name) and sold through the brokerage to consumers.
Unlike a traditional CDs purchased directly through a bank or credit union, however, brokered CDs purchased through your brokerage account can also be bought and sold on a secondary market.
Therefore the early withdrawal penalty does not exist for brokered CDs as one must simply sell their CD on the secondary market if funds from it are needed, rather than paying an early withdrawal fee.
There are risks involved in selling brokered CDs on the secondary market though. The major one being the risk of losing value especially when rates as a whole are on the rise.
If interest rates are rising (as with our current environment) and you need to sell a brokered CD that you opened back in 2020 when rates were less than 1 percent, you’d be forced to sell it at a major discount since new issue CDs would be much more attractive at 4-5% APY (annual percentage yield).
Conversely, if interest rates are falling and you need to sell your CD, you’d likely be able to sell it at a premium given that you purchased it with a better APY before rates fell.
Buying a Brokered CD
The brokerage firms that offer these products usually have online platforms for trading CDs on the secondary market and purchasing new issued ones.
If purchasing a new issue CD from your brokerage, you generally won’t encounter any up front fees. However, if you are purchasing a CD off of the secondary market, your brokerage firm may charge a fee to facilitate this. Depending on your brokerage the fees can be allocated in different ways. They may come in the form of a ‘ticket-charge’ which is essentially the fee the broker must pay to place your order. It may be a flat fee per transaction or it may be a fee placed on each increment of $1,000 you deposit. Be sure to get a thorough understanding of all potential fees you could face from your broker. Secondary markets, in general, can be tricky and may not have the volume required to buy or sell a CD at a favorable price.
You may also have the option to purchase “callable CDs” or non-callable CDs. A callable CD just means the institution can call it back if rates are dropping. If you want peace of mind knowing your funds will earn the fixed-rate for its duration, then a noncallable CD is the way to go. That said, callable CDs generally feature higher APYs since they can be called back at any time.
We should note that brokered CDs also have standard minimum deposit amounts that traditional CDs do. They also tend to be more restrictive on the exact amount you can invest and generally allow deposits in increments of $1,000. For example, you may buy a brokered CD with $2,000 or $3,000 but not $2,500.
Brokered CDs vs Traditional CDs
If you’re still on the fence as to whether or not a brokered CD or standard CD is a better option for you, we’ve put together a side by side table outlining the major differences and similarities of the two.
|Brokered CD||Traditional CD|
|Where Sold||Brokerage||Bank or Credit Union|
|Where Issued||Bank or Credit Union||Bank or Credit Union|
|Avg. Min. Deposit||$1,000||$1,000 or less|
|Best APY||4.75% (Charles Schwab)||4.86% (CFG Community Bank)|
|Compound Interest||No||Yes. Daily, Monthly or Quarterly.|
|Early Withdrawal Fees||No||Yes, unless no-penalty CD|
|Other Fees||Secondary market fees apply||None|
|Terms||1 mo – 20 years||3 mo – 5 years|
|Insurance||FDIC or NCUA*||FDIC or NCUA|
* Deposit insurance covers larger amounts with brokered CDs than standard CDs, as brokered CDs can leverage the FDIC or NCUA insurance of multiple banks and/or credit unions.
Another major difference in these two CD accounts that you may have spotted in the table above is the fact that brokered CDs do not provide compound interest.
Brokered CDs require interest to be distributed back to the account holder immediately. If you wish to compound your interest you will need to set up another account to reinvest your interest payments.
There is also no grace period with brokered CDs as these products do not auto-renew. Funds plus accrued interest are automatically placed back in your brokerage account upon maturity.
With traditional CDs you’ll typically get a 10 day grace period in which you can modify the CD or close it out entirely without encountering any fees. If nothing is done during the 10 day period, the CD generally automatically renews into a new CD with the same term and the going APY at that time.
Who Should Open a Brokered CD
Generally there are three main reasons one would opt for a brokered CD rather than a traditional one at a bank or credit union. These are:
- You need more than $250,000 in insurance coverage for your deposit. With brokered CDs you can hold deposits issued by multiple banks, effectively leveraging their FDIC insurance.
- You want longer or shorter terms than those offered by traditional banks or credit unions. Terms of as little as one month are usually available with brokered CDs as are terms of 20 years.
- You want the ability to cash out of your CD whenever you please. Unlike traditional CDs you won’t encounter any early withdrawal fees for doing this, you simply sell it on the open market. Keep in mind, however, that you must factor in potential broker fees in this scenario. You may find yourself better off currently going with an online savings account or money market account if you need liquidity.