What Is a Brokered CD? How They Work for Investors

A Certificate of Deposit (CD) represents a type of savings account that holds a fixed amount of money for a specified period, earning interest at a predetermined rate. A brokered CD is a specific variation of this product, offered and managed through a brokerage firm rather than directly from a bank.

What is a Brokered CD?

A brokered Certificate of Deposit (CD) is a debt instrument issued by banks or other financial institutions but offered to investors through a brokerage firm. Unlike traditional CDs purchased directly from a bank, brokered CDs are typically held within an investor’s brokerage account, with the brokerage firm serving as the custodian.

The brokerage firm acts as an aggregator, consolidating demand from numerous investors for CDs issued by various banks. This provides a centralized marketplace where investors can access a wide array of CD offerings from different institutions. This setup allows investors to diversify their holdings across multiple banks and maturities through a single brokerage account.

Banks utilize brokers to efficiently raise capital and diversify their funding sources beyond their local depositor base. By distributing their CDs through brokerage networks, banks can reach a broader investor audience. This broader reach helps banks secure funding more effectively, potentially offering competitive rates.

Interest payments on brokered CDs are handled by the brokerage firm, which credits them directly to the investor’s brokerage account. Interest may be paid monthly, quarterly, semi-annually, or at maturity. Investors can view their holdings and earnings through their online brokerage portal or account statements.

Key Characteristics and Distinctions

Brokered CDs possess several characteristics that differentiate them from traditional CDs. One significant distinction is the presence of a secondary market, which provides a degree of liquidity not typically found with conventional CDs. Investors can sell their brokered CDs on this secondary market before the stated maturity date, though the market value can fluctuate based on prevailing interest rates. If interest rates rise after a CD is purchased, its market value may decline.

Another characteristic is callability, where the issuing bank retains the right to redeem the CD before its scheduled maturity date. This feature is exercised when market interest rates decline, allowing the bank to refinance its debt at a lower cost. If a brokered CD is called, the investor receives their principal back along with any accrued interest.

Federal Deposit Insurance Corporation (FDIC) insurance applies to brokered CDs. Each brokered CD from a different issuing bank within a single brokerage account can be individually insured up to the standard FDIC limit of $250,000 per depositor, per insured bank, for each account ownership category. This is known as “pass-through” insurance, meaning the coverage passes through the brokerage firm directly to the underlying issuing bank. To ensure this coverage, brokerage firms must maintain accurate records that clearly identify the beneficial owner of each CD.

Yields and pricing for brokered CDs are influenced by current market interest rates, the issuing bank’s funding needs, and any embedded features like callability. Brokered CDs may sometimes offer more competitive yields compared to traditional CDs available at local banks. The pricing on the secondary market reflects these dynamics, with supply and demand dictating the trading value.

Investing in Brokered CDs

Investing in brokered CDs begins with selecting a reputable brokerage firm that offers a comprehensive selection. Many national brokerage houses provide access to a broad inventory of brokered CDs.

Opening a brokerage account is the next step. This process involves providing personal identification information, such as a Social Security number, date of birth, and government-issued ID. Financial details, including income and investment objectives, are also required.

Once the account is established, investors can research available brokered CD offerings through the brokerage firm’s online platform. These platforms allow users to filter CDs based on criteria such as maturity date, issuing bank, yield, and callability. Comparing these options helps investors identify CDs that align with their financial goals and risk tolerance.

Placing an order for a brokered CD involves selecting the desired offering and specifying the principal amount to be invested. This transaction can be executed directly through the online brokerage platform. The purchase price for brokered CDs is typically at par, though secondary market purchases can be at a premium or discount.

After purchasing a brokered CD, investors receive confirmation statements. Interest payments are credited directly into the investor’s brokerage account. Investors can monitor their brokered CD holdings through their online account portal or periodic statements.