Explore Brokered CDs vs. Bank CDs

April 8, 2024 Advanced
Certificate of deposit (CD) investing isn't limited to just banks. Learn the potential benefits and risks of brokered CDs and how they differ from bank-issued CDs.

When market volatility ramps up, particularly in a rising interest rate environment, many investors consider certificates of deposit (CDs)—those seemingly mundane fixed income mainstays available at your local bank. CDs can offer a respite for investors who want to safely park their money, allow it to generate a bit of income, and walk away knowing their invested cash is generally FDIC insured up to $250,000.1

But did you know there's an alternative to bank CDs? Brokered CDs allow you to access a wide selection of CDs with more convenience than a single bank does. Furthermore, brokered CDs offer the same FDIC protection as bank-issued CDs.

So, before you head to the bank and invest in a bank-issued CD, weigh the differences between bank CDs and brokered CDs. They can be broken down into five categories: transaction, selection, costs, potential benefits, and risks.

1. Differences in transaction

Where to buy: Bank CDs are often purchased directly from a bank, while brokered CDs are typically purchased through a brokerage.

Purchase process: A bank CD is a deposit product, where you begin earning interest immediately upon deposit. A brokered CD is an investment purchased in a securities account similar to the way a security is purchased. With the brokered CD, you don't start earning interest until settlement date of the trade.

Secondary market: Unlike bank CDs, which are typically held to maturity (lest you risk getting charged a penalty for early withdrawal), brokered CDs can often be sold on the secondary market before maturity. Just be aware that this can result in a net loss (typically if interest rates rise) or a net profit (if rates fall). In other words, if you sell before maturity, as with any fixed income investment, you're subject to the security's market value, which fluctuates as interest rates rise and fall.

2. Differences in selection

Choice of issuer: If you go to your local bank to purchase CDs, you're limited to the one issuer. However, brokered CDs allow you to choose from banks all over the United States, and because FDIC insurance protects up to $250,000 per bank, it's a more convenient way to invest more and keep yourself insured.

Choice of yield and terms: In general, the wider the range of CD products, the wider your selection of maturity terms, yields, and, of course, risks. If you shop carefully, you may be able to find more suitable—if not competitive—terms and yields by virtue of having a wider selection of choices.

3. Differences in costs

Transaction costs: Brokered CDs may cost more to obtain than bank CDs. The difference depends on the specific brokerage and the services it offers. Some brokerages may simply add the ticket charge to your costs, while others may charge fees for asset management, financial planning, and more.

Service: Higher transaction costs may reflect the potential benefits of a brokered CD platform. If a brokerage does most of the aggregating and vetting, provides you with access to multiple banks and CDs, shops around for competitive rates, and assists you with renewals, a reasonable fee might be worthwhile.

4. Potential benefits with brokered CDs

Brokered CDs offer some of the same benefits as bank CDs. They are steady and predictable; offer FDIC insurance1 and a broad selection of terms (maturity dates), and can also be held in a variety of investment accounts. Also, choosing brokered CDs can also make it easier to build CD ladders.

Steady and predictable: Locks in an interest rate for a set period of time, while also generally providing a better interest rate of return than a savings account.

Broad selection: You can hold brokered CDs in different investment account types, including IRAs, and they generally offer terms that range from one month to as long as 20 years.

Insure more money using FDIC coverage: Current FDIC coverage insures each individual bank up to $250,000 per depositor.

Creating bond ladders: It's easier to create bond ladders with brokered CDs than bank-issued CDs due to the wider range of CDs, including CDs with varying maturity dates to select from versus going to multiple individual banks to assess their offerings.

5. Potential risks with brokered CDs

Market risk: The most common risk is that you'll need your funds before the CD matures. Although there are no early redemption fees (like there are for bank-issued CDs), you may receive less than your original purchase price.

Call risk: For callable CDs, the issuer can redeem, or "call", your CD from you for the full amount before it matures (Note: This is true for both bank-issued and brokered CDs). The risk is that the issuer will exercise a call option at an unfavorable time for the holder, such as when interest rates decline.

Bottom line

Knowing both the pros and cons of bank-issued CDs versus brokered CDs can help an investor make an informed decision about which type of CD best aligns with their investing goals and objectives. As always, it's important for investors to do their own research and consult with a financial professional, when necessary, to discuss their particular situation.

1Funds deposited at an FDIC-insured institution are insured, in aggregate, up to $250,000 per depositor, per insured institution based upon account type by the FDIC. The FDIC considers any other deposits you may have with an issuing bank. CDs you purchase from a particular bank are aggregated with any other deposits you may have with the issuing bank for determining FDIC insurance coverage (i.e., if you already have deposits of $250,000 with a bank, newly purchased CDs from the same bank in the same ownership category may not be covered). Because the deposit insurance rules are complex, you may want to use FDIC's online tool, Electronic Deposit Insurance Estimator (EDIE), to estimate your total coverage at any particular bank.

The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.

All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness, or reliability cannot be guaranteed.

Examples provided are for illustrative purposes only and not intended to be reflective of results you can expect to achieve.

Schwab will usually receive a placement fee from the issuing institution in connection with the purchase of a CD. CDs from Schwab CD OneSource are issued by FDIC-insured institutions and are subject to change and system access. Unlike mutual funds, certificates of deposit offer a fixed rate of return and are FDIC insured up to $250,000, per depositor per institution, based on account ownership type. Visit www.fdic.gov for details. There may be costs associated with early redemption and possible market value adjustment.

A bond ladder, depending on the types and amount of securities within the ladder, may not ensure adequate diversification of your investment portfolio. This potential lack of diversification may result in heightened volatility of the value of your portfolio.  As compared to other fixed income products and strategies, engaging in a bond ladder strategy may potentially result in future reinvestment at lower interest rates and may necessitate higher minimum investments to maintain cost-effectiveness. Evaluate whether a bond ladder and the securities held within it are consistent with your investment objective, risk tolerance and financial circumstances.