Brokered CDs easy route to higher CD rates
As the name implies, brokered CDs are purchased through brokerages -- Fidelity, Schwab, Vanguard and TD Ameritrade are just a few of the institutions that carry them. Banks issue CDs in large denominations to brokerages, which then break them up for retail sale. Most brokerages don't charge a commission when they sell newly issued CDs to consumers, but if you buy the CD through a financial adviser you may be charged a fee by the adviser.
Benefits of buying CDs through a brokerage
The biggest benefits associated with buying brokered CDs are the aforementioned ease with which you can buy CDs under one account, your brokerage account, which simplifies recordkeeping, and you have access to a wide variety of maturities from numerous banks often paying better than standard rates.
There is no early withdrawal penalty with brokered CDs as there is when you buy one directly from a bank. The brokerage will try to sell your CD on the secondary market should you want to sell before maturity. The risk is that if interest rates have risen since you bought your CD, you could lose money.
Because the CDs are FDIC-insured, the ability to buy from different banks makes it easy to boost your coverage if you run the risk of exceeding the current $250,000 cap.
Brokerage CDs are often callable,
especially those that have longer maturities. This means that the bank that issues the CD has the right to buy the CD back from you before maturity. Usually this happens when interest rates drop substantially below the rate you're receiving.
Be cautious when choosing a brokerage
You should be cautious about where you buy a brokered CD. It's probably best for do-it-yourselfers to stick with well-known firms. There have been instances where elderly customers were sold CDs with 20-year maturities and suffered substantial losses when they tried to sell them.
A brokered CD with an interest rate markedly above what others are offering may or may not be a warning sign. You'll receive your insured deposit if the bank fails but you won't necessarily receive your money as quickly as would a customer of the bank.
If you'd prefer CDs with higher yields, scan Bankrate's high-yield CD database for some of the best deals across the country. You'll have to buy through individual banks but the return may be worth it.
However you like to buy them, a good practice is to ladder CDs. This enables you to reap the better returns of longer maturities while having some money invested in shorter-term CDs which mature quickly and can be used for cash needs or be reinvested.
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