A Brokered Certificate of Deposit is a Certificate of Deposit (CD) purchased through a brokerage firm instead of directly from a bank. Think of your brokerage as a savvy shopper with a bulk discount card. It goes out into the national marketplace and buys massive, “jumbo” CDs from various banks that are competing for funds, often securing higher interest rates than a local bank might offer you. The brokerage then slices these jumbo CDs into smaller, investor-friendly pieces and offers them to clients like you. This arrangement not only opens the door to potentially better yields but also introduces a game-changing feature: liquidity. Unlike a traditional CD that locks your money up and charges a hefty penalty for early withdrawal, a brokered CD can typically be sold to another investor on the secondary market before it matures, offering a level of flexibility that cash-holding investors crave.
The process is surprisingly straightforward. You simply log into your brokerage account and browse the available CDs, much like you would shop for stocks or bonds. You’ll see a list of CDs from different banks across the country, each with its own yield and maturity date. When you buy one, the brokerage handles the transaction, and the CD is held in your account. The interest payments are deposited directly into your brokerage account. The key here is that while you buy through a broker, the actual CD is issued by a bank. This is a crucial distinction for understanding deposit insurance.
While they share a name, brokered and traditional bank CDs are quite different animals. Understanding these differences is key to using them wisely.
This is the biggest differentiator.
Brokered CDs often—but not always—come with higher yields. This is because your brokerage is shopping for the best rates from a nationwide pool of banks, many of which are smaller and use brokered CDs to attract deposits without the expense of a large branch network. This competition works in your favor.
This is a point of frequent confusion, but the news is good. Brokered CDs are typically insured by the FDIC (or NCUA for credit unions) up to the standard limit, just like traditional CDs. The insurance comes from the issuing bank, not your brokerage. This offers a fantastic advantage: you can buy CDs from multiple different banks all within a single brokerage account, effectively insuring far more than the standard FDIC limit without having to open accounts at dozens of different banks. For example, you could buy FDIC-insured CDs from Bank A, Bank B, and Bank C all through Brokerage X, and your deposits at each bank would be insured separately.
For a value investor, brokered CDs aren't a tool for getting rich; they're a tool for staying rich. The legendary Benjamin Graham advised “defensive investors” to hold a mix of stocks and high-quality bonds. Brokered CDs can be an excellent component of the conservative, fixed-income portion of a portfolio. They serve as a high-quality cash equivalent for parking capital while you wait for great investment opportunities to appear. They offer predictability and capital preservation, which are cornerstones of value investing. However, a true value investor always considers the risks. The primary risk with a brokered CD is interest rate risk. If you buy a 5-year CD and interest rates shoot up a year later, your money is tied up at a subpar rate. You either hold it to maturity and suffer an opportunity cost, or you sell it on the secondary market at a loss. Therefore, it's wise to build a “CD ladder”—buying CDs with staggered maturity dates (e.g., 1-year, 2-year, 3-year)—to mitigate this risk and ensure parts of your cash are regularly becoming available to reinvest at current rates.
Brokered CDs are generally safe, but there are a few “gotchas” to be aware of.
Watch out for callable CDs. This feature gives the issuing bank the right to “call” or redeem the CD from you before its maturity date. They will only do this if it's in their favor—namely, if interest rates have fallen. The bank gets to pay you back your principal and stop paying you the high-interest rate, leaving you to reinvest your cash at the new, lower rates. It's a “heads they win, tails you lose” situation, so always check if a CD is callable before you buy.
We mentioned this before, but it's worth repeating: if you need to sell your CD before maturity, its value is not guaranteed. You are subject to the whims of the market. Only invest money in CDs that you are reasonably certain you won't need before the maturity date.
While many brokered CDs have no explicit commission (the brokerage's fee is built into the yield they offer you), it's always good practice to understand the cost structure. Some firms may charge a fee for selling on the secondary market. As always, read the fine print!