Broker Check

Certificates of Deposits (CDs) Purchased Through a Brokerage Firm.

September 05, 2023

Certificates of deposit offered through brokerage firms are known as "brokered CDs." These CDs are provided to clients by partnering with various banks and financial institutions. While they share similarities with traditional bank-issued CDs, some differences exist.

Investors can choose from a broader range of CDs with brokered CDs as multiple banks and financial institutions issue them. This diversity makes it easier for investors to compare rates and terms. Brokerage firms may also provide access to CDs with potentially higher interest rates than those available directly from individual banks, as they source CDs from different banks.

Brokered CDs provide various maturity terms ranging from a few months to several years; this depends on the partnering banks' offerings. Some brokered CDs offer more flexible features like callable or step-up CDs. Callable CDs allow issuers to recall the CD before its maturity date, while step-up CDs can increase the interest rate at predetermined intervals.

Investors can enjoy an advantage with brokered CDs due to their secondary market, which allows them to sell their CDs to other investors before the maturity date. This feature provides liquidity that traditional bank CDs do not offer, giving investors access to their funds if necessary. Additionally, brokered CDs come in different structures regarding interest payouts. Some CDs distribute interest throughout the investment period, providing a steady income stream. Others, however, defer interest payments until maturity, allowing the interest to compound over time; this can result in higher returns for the investor, but it depends on their financial goals.

It's important to note that brokered CDs issued by FDIC-member banks are typically FDIC-insured up to the maximum limit per depositor per institution, just like CDs purchased directly from banks. This can provide investors an extra layer of security and helps protect their funds.