The Brokered Certificate of Deposit: The Advantages and Risks

Barbara Marquand | guest writer for GoTalkMoney

If you have a lot of money to invest in CDs, you might consider having a broker invest for you.

But brokered CDs come with risks, and it's critical that you understand the difference between a brokered CD and a certificate of deposit you purchase yourself. After weighing your options, you might decide you're better off shopping for the best banks and best CD rates on your own.

Paying a Broker to Find Best CD Rates: Three Advantages

1. Often, a broker can negotiate a higher interest rate by agreeing to invest a huge sum in a bank. Then the broker splits up the CD and sells pieces to consumers like you, so you benefit from the higher rate even though you don't have the huge amount of cash required to get it.

2. A brokered CD program offers convenience, particularly if you have a large sum to invest. Services vary, but a good brokerage firm will keep track of your deposits and provide one 1099 at the end of the year. The firm will notify you when CDs are getting close to their maturity dates so you can decide the best ways to reinvest. And a good broker will make sure your CD portfolio is invested in stable banks and your deposits are within the insurable limits of FDIC coverage.

3. You still maintain control, choosing terms of one month to several years or more for your CD investments and the denomination amounts for CDs.

Just like with CDs you purchase yourself, with brokered CDs you agree to deposit the money in a bank for a certain amount of time, and the bank agrees to pay a certain amount of interest. But there are some significant differences.

Certificate of Deposit through a Broker: Four Risks and Considerations

1. The convenience of brokered CDs isn't free. You'll pay fees for the broker's services. Make sure you understand how the fees are calculated, how much they will cost, and whether they could wipe out any additional interest earnings you would gain using the broker.

2. You incur market risk. With CDs you buy yourself, you forfeit some of your interest earnings as a penalty if you withdraw the money before the maturity date. But if you own just a part of a brokered CD, which is often the case, your share of the CD must be sold on the secondary market for you to get the money. If interest rates rise, buyers probably won't want to pay the full value of the CD, and you'll lose money.

3. You could also lose all your money if your broker invests in CDs with institutions that are not FDIC-insured or does not check to make sure all your deposits at a particular institution are within insurable limits for FDIC protection.

4. You sacrifice liquidity. Even if the institutions issuing the CDs are FDIC-insured and your deposits are within insurable limits, you'll face more hassles getting your money back if those banks fail than if you bought the CDs from the issuers yourself. Why? With brokered CDs, the brokerage has the direct relationship with the bank. You still will get your money back, but more red tape may be involved.

Highest CD Rates? Investigate Thoroughly

Deposit brokers don't have to be licensed, so anyone can claim to be a CD broker. The U.S. Securities and Exchange Commission recommends you thoroughly check the background of any brokers or companies you're considering. Follow these tips:

• Find out where the CD broker is considering depositing your money, and make sure those institutions are stable and FDIC-insured.

• Confirm that your deposits are within the current $250,000 per bank limit.

• Understand the terms of the CDs. A growing number of elderly customers have complained to the SEC about investing in what they thought were short-term CDs through brokers, only to learn later their money was locked up for 20 years.

If you decide you're better off investing in CDs on your own, shop for best CD rates online. You can find best bank rates for one-month CDs to seven-year CDs.


Sandra BlockDon't get burned by tricky brokered CDs • Don't get burned by tricky brokered CDs • Oct 31, 2000 • http://www.usatoday.comhttp://www.usatoday.com/money/perfi/columnist/block/0033.htm
Richard Burnett • Are Brokered CDs too Good to be True? Look Closer • Jun 30, 2009 • http://rismedia.comhttp://rismedia.com/2009-06-29/are-brokered-cds-too-good-to-be-true-look-closer/
Securities and Exchange Commission • High-Yield CDs ? Protect Your Money by Checking the Fine Print • Dec 03, 2008 • http://www.sec.govhttp://www.sec.gov/investor/pubs/certific.htm
Dan Burrows • Brokered CDs Pose Risks, Rewards • Aug 25, 2008 • http://www.smartmoney.comhttp://www.smartmoney.com/investing/economy/brokered-cds-pose-risks-rewards-23742/

Disclaimer:This content is not provided or commissioned by American Express. Opinions expressed here are author's alone, not those of American Express, and have not been reviewed, approved or otherwise endorsed by American Express. This site may be compensated through American Express Affiliate Program.

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