Brokered CDs can have advantages over traditional CDs that are purchased directly from banks or credit unions; however it is crucial to go into this type of investment with eyes wide open so that you are aware of both the benefits and the risks.
One of the biggest advantages people note for purchasing a brokered CD is the fact that the rates are generally higher than bank CD’s. This is because they are aggregating a certain number of depositors and bringing more business to the bank. Additionally, many of these investment tools come with variable interest rates and sometimes no early withdrawal penalties (although there is some grey area in this benefit).
However, even if the brokered CD has the best rates, you should do some research before you sign on the dotted line. There are some complex considerations you should fully understand before committing to a brokerage CD. Here are some to think about:
- Ask about account fees. Some brokerage accounts have closing fees of up to $100, which would essentially negate any extra income you might receive from a higher rate.
- Research the broker’s credentials and experience. Verify licenses and credential background and standing with an agency, such as FINRA (the Financial Industry Regulatory Authority at http://www.finra.org or 1-301-590-6500).
- Know where the CD will be held. Unlike a traditional CD, this type of certificate of deposit may be held by a group of investors rather than a bank. If you are co-invested with several investors on a single CD, it might not even be held in your name.
- Know if there are penalties for early withdrawal. A brokered CD may claim there are no penalties for early withdrawal, but if you share the CD with other investors, your broker must find another buyer for your share of the CD. Sometimes this results in a discounted sale of the CD which will eat into the return on your investment.
While not all Brokerage CDs are bad, they are very complex financial products. When in doubt, seek the advice of a trusted fee-only advisor who can ensure that you are purchasing a CD at the highest possible rate with the lowest possible fees or other penalties.