The Advantages of Brokered CDs

Brokered CDs are certificates of deposit sold by brokerage firms that typically offer higher yields. But they don't come without some risk.

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Brokered certificates of deposits take these safe-but-stodgy investments and give them a turbo boost — they're a key way to take advantage of rising interest rates.

You buy brokered CDs through a brokerage firm. Brokered CDs typically provide above-average yields when compared with CDs offered through banks. For example, a one-year brokered CD at Fidelity yields 3.45%. A top-yielding one-year CD from a bank pays 2.80%, on average, according to DepositAccounts.com, a rate comparison site. 

Another pro: You’re not subject to early-withdrawal penalties. Brokerage firms that do this sort of packaging usually maintain an active secondary market for their CDs, meaning you can sell them back (by withdrawing your money) before they mature. Bank CDs have early-withdrawal penalties that range from three months’ to a year’s interest. 

However, having the flexibility to sell comes with potential drawbacks. First, your proceeds from selling a CD before it matures can vary with changes in interest rates. If rates have risen, you won’t get back as much as you paid for the CD. (On the other hand, if rates have fallen, you should get more.) CDs in the secondary market act in many respects like short-term bonds: When rates rise, the values of existing bonds fall; when rates fall, bond values rise. Another pitfall is that some of these CDs may be callable, meaning that if interest rates fall, the brokerage firm may redeem or sell your CD before maturity. In that case, you’ll miss out on future interest. 

You can buy brokered CDs at investment firms such as Charles Schwab, Fidelity and TD Ameritrade. Ask about the minimum requirement to purchase CDs, as well as possible fees. TD Ameritrade, for example, has a minimum requirement of $1,000, with a mark-up or mark-down price included in your price quote when buying or selling new issues. Also make sure your CD is insured by the Federal Deposit Insurance Corp. Brokerage firms typically partner with FDIC-insured banks, but not always.

Rivan V. Stinson
Rivan V. Stinson
Ex-staff writer, Kiplinger's Personal Finance

Rivan joined Kiplinger on Leap Day 2016 as a reporter for Kiplinger's Personal Finance magazine. A Michigan native, she graduated from the University of Michigan in 2014 and from there freelanced as a local copy editor and proofreader, and served as a research assistant to a local Detroit journalist. Her work has been featured in the Ann Arbor Observer and Sage Business Researcher. She is currently assistant editor, personal finance at The Washington Post.

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