Brokered CD vs Bank CD: Which One is Right for You?

Many people are not familiar with brokered CDs, even if they know what a CD is. There are several differences to consider when evaluating brokered CDs vs bank CDs, although brokered CDs almost always make more sense (in my experience).

What is a CD?

For those unfamiliar, a certificate of deposit (CD) is a deposit product offered by banks and credit unions. CDs typically offer higher interest rates than traditional checking and/or savings accounts. Unlike checking and savings accounts, CDs have fixed terms ranging from less than a month to several years. Banks sell CDs directly to their customers as well as through brokers.

Bank CD Basics

When you open a CD account at a bank, you agree to leave your money on deposit for a rate and term. You also typically agree to pay a penalty (or forego some accrued interest) if your withdraw or close the account early.

Bank CDs are generally covered by the Federal Deposit Insurance Corporation (FDIC) up the applicable limits. This makes them a safe investment option for those who want to earn more interest than a traditional savings account (assuming the amount is below FDIC insurance limits).

What is a Brokered CD?

A brokered CD is a type of CD that is offered through brokerage firms. Unlike traditional bank CDs that are bought directly from a bank, brokered CDs are purchased through brokerage firms.

Brokered CDs offer several benefits over traditional bank CDs, including higher rates (generally). Oftentimes, a bank will offer a lower rate to its own customers and a higher rate to brokered CD buyers. Additionally, brokered CDs can often be bought and sold on the secondary market before maturity. This means that investors can cash out their CDs early if they need to, although the price may be below (or above) par depending on how interest rates have moved.

There are also some downsides to brokered CDs. For one, they can be more complex than traditional bank CDs, as they may have different terms and conditions depending on the issuing bank. Investors should carefully consider their options before investing in a brokered CD and should seek advice from a financial professional if they are unsure.

Key Differences: Bank CDs vs Brokered CDs

Interest Rates

When it comes to interest rates, bank CDs typically offer lower rates than brokered CDs

It’s important to note that interest rates can vary widely between different banks and brokerage firms, so investors should consider shopping around to compare rates before investing.

FDIC Insurance

One of the key differences between bank CDs and brokered CDs is FDIC insurance. Multiple CDs at same bank could expose a depositor to risk if the aggregate amount is above FDIC limits. This is easy to avoid with brokered CDs as investors can buy CDs from many banks (and limiting the investment in any single CD to FDIC insurance maximums).

Accessibility and Liquidity

Another key difference between bank CDs and brokered CDs is accessibility and liquidity. Bank CDs are typically less liquid than brokered CDs because they are held at a single bank and cannot be traded on a secondary market. This means that if you need to access your funds before the CD matures, you may be subject to early withdrawal penalties.

Brokered CDs, on the other hand, can be bought and sold on a secondary market. However, this also means that their value can fluctuate based on market conditions, and you may not be able to sell them for the full value of your investment.

Minimum Investments

When it comes to minimum investments, bank CDs typically have lower minimums than brokered CDs. Many banks offer CDs with minimum investments as low as $500, while brokered CDs are typically sold in $1,000 increments.

Early Withdrawal Penalties

Finally, it’s important to consider early withdrawal penalties when choosing between bank CDs and brokered CDs. Bank CDs typically have fixed early withdrawal penalties, which are often a percentage of the interest earned or a set number of months’ worth of interest.

Brokered CDs, on the other hand, may be sold on the secondary market. This is one of the largest differences between a brokered CD vs bank CD.

Pros and Cons of Bank CDs

Pros

Bank CDs offer several advantages to investors, including:

• FDIC Insurance: CDs are are covered by the FDIC, up to a maximum defined by the FDIC.
• Low Risk: Bank CDs are considered low-risk investments because they are essentially cash investments (unlike riskier stocks, bonds, etc.)
• Simple: CDs are extremely easy to understand, even for those who are not financially sophisticated.
• Easy to Open: Bank CDs are easy to open and can be done in-person, online, or over the phone.
• Fixed Interest Rate: Bank CDs often offer a fixed interest rate, which means that you know exactly how much you will earn over the life of the CD.

Cons

While bank CDs offer several advantages, there are also some drawbacks to consider:

• Low Returns: Bank CDs typically offer lower returns than other types of investments, including brokered CDs.
• Early Withdrawal Penalties: If you need to withdraw your money before the CD matures, you will likely face an early withdrawal penalty. This penalty can eat into your returns and reduce (or even eliminate) the overall return of your investment.
• No Flexibility: Once you invest in a bank CD, you cannot typically access your funds until the CD matures (unless you pay a penalty). This lack of flexibility can be a disadvantage if you need the money for an emergency or unexpected expense.

Pros and Cons of Brokered CDs

Pros

Brokered CDs offer several advantages over traditional bank CDs, including:

• Higher Yields: Brokered CDs can offer higher yields than bank CDs, making them a more attractive investment option for some investors.
• Greater Variety: Brokered CDs may have longer terms or a greater variety of maturity terms compared to bank CDs, providing more options for investors.
• FDIC Protection: Brokered CDs typically offer FDIC protection, just like bank CDs.
• Flexibility: Brokered CDs can be purchased and sold on the secondary market, providing investors with more flexibility than traditional bank CDs.

Cons

While brokered CDs offer several advantages, there are also some potential drawbacks to consider:

• Higher Minimum Deposits: Minimum deposits for brokered CDs may be slightly higher than those for bank CDs, which could be a barrier for some investors.
• Less Accessible: Brokered CDs may be less accessible than bank CDs, as they are typically sold through brokerage firms and not directly through banks.
• Market Risk: Brokered CDs are subject to market risk, meaning their value can fluctuate based on changes in interest rates and other market forces.
• Less Familiarity: Some investors may be less familiar with brokered CDs and how they work, which could make them hesitant to invest in them.

Which One is Right for You?

When evaluating a brokered CD vs bank CD, it’s important to consider your individual financial goals and needs. That being said, I have never seen a scenario in which a brokered CD was the better choice.

Ultimately, the decision between a brokered CD and a bank CD will depend on your individual financial situation and goals. It’s important to do your research and compare the options before making a decision.

It’s important to do your research and carefully consider all the factors before making a decision. Remember to check the FDIC protection on any CD you invest in, and make sure you understand the terms and conditions of the CD before committing your funds.

Further Reading

Investors considering CD may also want to consider Treasuries. Read my comparison of CDs vs Treasuries. Investors willing to take substantially more risk for a fixed return may also want to look at hard money lending.