What is a Brokered CD?

A brokered certificate of deposit (CD) is a CD which is sold by a broker, rather than through a bank. There are advantages and disadvantages to investing in a brokered CD which should be considered carefully before making any decisions. One thing to be aware of is that they are usually insured by organizations such as the Federal Deposit Insurance Corporation (FDIC) in the United States, because they originate in banks, but there may be some caveats which can complicate matters in the event of a bank failure.

When someone goes to purchase a CD in a bank, he or she is usually only offered access to that bank's CD products. By contrast, when someone approaches a broker or financial adviser, an array of CDs may be available. Brokered CDs are issued by a bank which has an arrangement with a broker; in exchange for interest rate guarantees, the broker promises to bring in new depositors by selling CDs to them. Essentially, the broker buys a very large CD and then splits it up among investors.

Unlike a regular CD, a brokered CD can be bought and sold, traded like other types of investments. The secondary market for these financial products is not always highly active, and people should not count on being able to sell a brokered CD if they need liquidity in a hurry.

One issue with brokered CDs is that it is important to find out which bank issues the CD one plans to buy. If the buyer already has funds on deposit at that bank and the bank fails, it's possible to lose any funds over the guaranteed deposit amount. Additionally, if someone buys a brokered CD which is issued by a bank with a poor credit rating, this can be a risky decision. It is also important to read the fine print of the deal to understand how interest rates will be applied, which kind of penalties may be incurred for trying to cash in the CD before maturity, and so forth.

A reputable broker will provide an investor with as much information as possible about financial products. He or she should also keep excellent records, which can expedite a claim in the event that there is a bank failure and someone wants to recover funds invested in a brokered CD. People who are interested in using a brokered CD as an investment vehicle should talk to their financial advisers or brokers about the available options.