How to buy a brokered CD
Open a brokerage account: To purchase a brokered CD, you'll need a brokerage account. If you don't have one already, research well-known brokerage firms and open an account. Ensure the brokerage you choose offers brokered CDs. Many do.
Do your research: Before purchasing, research various brokered CDs offered by different banks in terms of maturity, interest rates, and terms. Look into the credit ratings of banks issuing the CDs to ensure you’re investing in a stable institution. Typical brokered CD terms can run from one month to 20 years vs. conventional CDs, which typically run from three months to five years.
Place an order: Once you've chosen a brokered CD, place an order through your brokerage platform, much like buying stocks or bonds. Specify the amount you want to invest and any other necessary details.
Monitor and manage: After purchase, keep an eye on your investment. Remember that if you need to access your funds before maturity, you might be able to sell your brokered CD on the secondary market. However, prices can fluctuate based on interest rates and market demand. Upon maturity, the principal and any accrued interest are typically returned to your brokerage account, unless you choose to reinvest or specify otherwise.
Understand the fees: Brokerages might charge fees for purchasing or selling brokered CDs. Be aware of these costs and factor them into your investment decision.
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Do brokered CDs earn higher interest?
Brokered CDs can offer higher rates than conventional bank CDs, but it's no sure thing. The rate difference between the two depends on various factors:
Bulk purchases: Brokerage firms purchase CDs in large quantities, which can lead to better-negotiated rates, often passing these higher rates to investors.
Market dynamics: Just like other securities, brokered CDs are subject to market dynamics. Supply and demand can influence the rates that brokered CDs offer at any given time.
Broader access: Brokers have access to a wide range of banks, including those that are inaccessible to an individual investor. This broad access can sometimes lead to finding banks that offer better rates than local institutions.
Duration and structure: Some brokered CDs may have non-traditional structures or longer durations, which can result in higher rates compared to conventional CDs. However, these might also come with additional risks or conditions.
Economic environment: During certain economic conditions, especially when interest rates are volatile, brokered CDs might have more attractive rates than their conventional counterparts. In stable environments, the rate difference might be negligible.
Overhead costs: Conventional banks have physical branches, employees and other overhead costs that might lead to offering slightly lower rates on CDs to maintain their profit margins. In contrast, issuing CDs to brokers might involve fewer overhead costs, allowing for potentially higher rates.
Pros and cons
For savers seeking stability, CDs, generally speaking, make a ton of sense: Today’s rates of 5% or more – especially against a stock market where negative returns are real – make them a smart money move. It follows that brokered CDs – which are aimed at finding those higher-earning rates – are even smarter.
But are they for everybody? Considers the pros and cons:
Pros of a brokered CD
Wider selection, better rates: Perhaps the most enticing benefit of brokered CDs is the access to a vast array of options. Since brokerage firms deal with multiple banks across different regions, they often present a curated collection of CDs that offer better interest rates than what one might find at their local bank. This expansive selection ensures investors can always choose a CD that best fits their financial strategy and desired yield.
Diversification potential: Diversification is a cornerstone of risk management in investments. With brokered CDs, investors can easily spread their funds across various banks and geographical locations. This diversification can protect investors from the adverse financial health of any single institution.
Convenient portfolio management: Consolidating investments under one roof – the brokerage firm – offers tough-to-beat convenience. Instead of juggling multiple bank accounts and keeping track of several CDs, an investor can get an integrated view of their holdings, making portfolio management smoother.
Flexibility with secondary market: Life is unpredictable, and sometimes liquidity needs arise unexpectedly. While traditional CDs can be restrictive, many brokered CDs offer the advantage of being sold on the secondary market before their maturity. This can be a lifesaver, although it's worth noting that the sale price can vary based on market conditions. (Do you really need your cash with no penalty at withdrawal time? Check out the emerging new class of no-penalty CDs.)
Automatic renewal alternatives: Unlike many traditional CDs that automatically renew for the same term upon maturity, brokered CDs typically return the principal and interest to the investor's brokerage account. This ensures that funds aren't locked into potentially undesirable terms without the investor's explicit consent.
FDIC insurance: Just like traditional CDs, brokered CDs come with FDIC insurance. This means that up to the insurance limit – up to $250,000 per depositor, per institution – an investor's principal is protected, providing peace of mind against bank failures.
Comparative shopping: The ability to compare offerings from different banks quickly and efficiently is an underrated advantage. With brokered CDs, one can easily contrast rates, terms and conditions, ensuring a more informed decision-making process.
Cons of a brokered CD
While brokered CDs have gained significant traction among investors for their range of benefits, they also come with certain drawbacks.
Complexity and learning curve: For novice investors or those accustomed to the straightforward nature of buying CDs directly from banks, the world of brokered CDs can be daunting. The process involves navigating brokerage platforms, understanding the nuances of secondary markets, and making sense of a wider array of options.
Potential fees: Brokerages may charge fees for their services, which can eat into the overall returns of the investment. Whether it's for purchasing, selling, or even managing the CD, these costs can make brokered CDs less attractive compared to conventional CDs, where there usually aren't intermediary fees.
FDIC coverage limitations: While both brokered and conventional CDs offer FDIC insurance, keeping track of coverage limits can be more complex with brokered CDs. If an investor buys multiple CDs through a broker from different banks, they need to ensure that their total deposits at any individual bank do not exceed the FDIC coverage limits.
Call features: Some brokered CDs come with "call" features, allowing the issuing bank to "call" or terminate the CD before its maturity date. While this might come with a slightly higher yield, it introduces uncertainty, as the investor might not get the anticipated interest if the CD is called early.
Early withdrawal challenges: Traditional bank CDs have clear, albeit sometimes costly, early withdrawal penalties. On the other hand, liquidating a brokered CD requires selling it on the secondary market, where the price can be influenced by prevailing interest rates and demand, potentially leading to losses.
Automatic renewal clarity: While many appreciate that brokered CDs typically don't auto-renew, others might miss this feature, especially if they prefer the set-it-and-forget-it approach of conventional CDs, where the investment rolls over automatically.
Relationship benefits lost: Direct banking relationships can come with perks such as better loan rates, fee waivers, or premium services. Investing substantial funds in brokered CDs might mean foregoing some of these relationship advantages.
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Brokered CDs vs. traditional bank CDs
Choosing between brokered and conventional CDs depends on individual preferences and financial objectives. Those seeking variety, potentially better rates and flexibility might lean towards brokered CDs. Those who value direct bank relationships, simplicity and a straightforward approach might opt for conventional CDs. Whichever route you choose, it's crucial to be informed and align your choice with your investment strategy.
- Brokered CDs: Instead of dealing directly with a bank, you're going through an intermediary – a broker – who presents offerings from various institutions.
- Conventional CDs: You purchase these directly from a bank or credit union, typically one you're familiar with or where you hold an account.
Selection and rates:
- Brokered CDs: Brokerages provide access to a vast array of CDs from different banks and often across regions. This breadth often means better interest rate options and terms that can be tailored to individual needs.
- Conventional CDs: Your choices are limited to the offerings of that particular institution, which might not always be the most competitive in the market.
- Brokered CDs: They often have the perk of being sold on a secondary market before maturity, providing an avenue for liquidity if needed. However, the sale price is subject to market conditions.
- Conventional CDs: Early withdrawals usually have penalties, making them less flexible. The process is straightforward but can be costly.
Fees & costs:
- Brokered CDs: Brokers might charge fees for purchasing or managing your CD, which can affect your overall returns.
- Conventional CDs: Directly purchasing from banks generally doesn't involve intermediary fees.
- Brokered CDs: They're FDIC-insured, but tracking coverage can be complex if you have multiple CDs from different banks through one broker.
- Conventional CDs: Also FDIC-insured, it's simpler to track your coverage limits when dealing directly with a single bank.
- Brokered CDs: While they offer a broad range of choices, you might miss out on the relationship benefits that banks offer to direct customers.
- Conventional CDs: Regular customers might enjoy perks such as preferred rates, fee waivers, or other bonuses due to their existing relationship with the bank.
Are brokered CDs worth it?
Brokered CDs are worth exploring, especially for investors looking to diversify their portfolios, seek potentially higher yields, or take advantage of the conveniences offered by brokerage platforms. Like any investment, it's crucial to understand both their advantages and disadvantages before diving in.
But the advantages are hard to argue. Brokered CDs provide access to a broader range of offerings from various banks across different regions, giving investors the chance to find terms and rates that might not be available through their local bank. And since brokers deal with large volumes, they sometimes negotiate better rates which are then passed on to the investor.
Adding brokered CDs to your portfolio can be seamless if you already have a brokerage account. It also provides consolidated management of your investments, while allowing investors to spread funds across different banks and regions easily and providing an added layer of security.
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