Are Bank CDs Better Than Brokered CDs?
Written by
Melanie Grafil, AI Editor
Edited by
Melanie Grafil
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In the world of savings and investments, certificates of deposit have long been a favored choice for those seeking a safe and steady return. But when it comes to choosing between bank CDs and brokered CDs, many investors find themselves pondering, “Are bank CDs better than brokered CDs?” This question is particularly relevant today, when you’re looking for the best CD rates that can significantly impact your savings.
Understanding Bank CDs and Brokered CDs
A bank CD is similar to a savings account that you set up with a bank. When you put your money into a CD, you’re agreeing to leave it there for a certain amount of time, called the “term.” In return, the bank promises to pay you interest.
The longer you agree to leave your money in the CD, usually, the more interest the bank will pay you. Think of it as a way to earn more money on your savings, but you can’t touch that money for a while without a penalty.
Brokered CDs, on the other hand, are CDs sold through brokerage firms. These CDs are issued by banks but are bought and sold like securities through brokers. They offer more flexibility in terms of investment options and often have higher yields.
Here’s what you should know about these two types of CD investments.
Rates and Returns
One of the primary factors when choosing between bank CDs and brokered CDs is the interest rate, or in other words, the pursuit of the best CD rates. Typically, brokered CDs offer higher interest rates compared to bank CDs. This is because brokers have access to a national marketplace and can shop around for the best rates from various institutions. Compare the rates carefully, and consider factors like the term length and the size of the deposit.
Accessibility and Convenience
When it comes to ease of access, bank CDs often come out ahead. You can easily open a bank CD at your local bank or through its online banking platform. The process is straightforward, and many people appreciate the familiarity and direct relationship with their bank.
Brokered CDs, while offering a broader range of options, require you to have a brokerage account. This might be a hurdle for those who are not active investors or who prefer to keep their savings and investments separate.
Safety and Security
Both bank CDs and brokered CDs offer a high level of security, especially if the issuing bank is FDIC-insured. However, there’s a slight edge to bank CDs in terms of simplicity. With a bank CD, your investment is straightforward — your money is in one place, and you know exactly how much you’ll get on maturity.
Brokered CDs are a bit trickier than regular CDs. You can buy and sell them like stocks, so their price can go up and down. However, if you keep your brokered CD until the end of its term, you’ll still get back the amount you originally invested. But remember, this buy-and-sell feature makes them a bit more complex.
Flexibility and Terms
Brokered CDs often win in terms of flexibility. They come in a variety of terms, and you can sell them on the secondary market before maturity if needed. However, selling early might result in a loss if the market rates have changed.
CDs, meanwhile, are generally less flexible. They come with early withdrawal penalties, making them a less suitable option for those who might need access to their funds before the term ends.
Liquidity and Market Conditions
Brokered CDs are more liquid than bank CDs because you can sell them on the secondary market. This is a big plus, especially when interest rates are going up and you might want to take your money out to invest in another type of fund with a better rate.
However, this liquidity can also be a double-edged sword. If market conditions aren’t favorable, selling a brokered CD might result in getting less than the principal amount you invested.
Taxes
From a tax perspective, both bank CDs and brokered CDs are similar. The interest earned is taxable, and there’s no significant difference in how they are treated for tax purposes. However, brokered CDs might offer more options for managing liabilities, especially if they’re held in a tax-advantaged account like an IRA.
Brokered CDs: A Closer Look at the Pros and Cons
Unlike traditional bank CDs, brokered CDs are offered through brokerage firms and provide different benefits and risks.
Pros of Brokered CDs
- Higher interest rates: Brokered CDs often offer higher interest rates compared to traditional bank CDs. Brokers have access to various banks, enabling them to find the best rates.
- Different term options: These CDs come in a wide range of terms, giving investors the flexibility to choose durations that align with their financial plans.
- Liquidity through secondary market: You can sell brokered CDs before they reach maturity, so you can access your cash quickly.
- Diversification: Investing in brokered CDs from different banks can spread risk, offering a diversified investment portfolio.
- No early withdrawal penalties: If sold on the secondary market, brokered CDs don’t incur the early withdrawal penalties typical of bank CDs.
Cons of Brokered CDs
- Market risk: Selling a brokered CD before maturity on the secondary market might result in a loss, especially if interest rates have risen.
- Complexity: You’ll need an account with a broker and a good grasp of how the market works.
- Fees: Brokerage firms may charge fees for transactions involving brokered CDs, which can affect overall returns.
- No fixed return if sold early: The return on a brokered CD sold before maturity depends on the current market conditions.
- Potential lack of FDIC insurance on secondary market: While initially FDIC-insured, this protection might not apply to brokered CDs sold on the secondary market.
- Interest payment variations: Some brokered CDs only give you the interest at the end, not during the term, which can affect your budget planning.
By evaluating these pros and cons, you can hopefully better determine if brokered CDs are suitable for their investment strategy and risk appetite.
Is a Brokered CD Right for You?
Brokered CDs can be an attractive option for those seeking higher interest rates and more flexibility in terms of investment duration compared to traditional bank CDs. They are particularly beneficial if you’re looking to diversify your portfolio across different banks and terms. However, they also come with increased complexity and potential risks, such as market fluctuation impacts and possible fees associated with using a brokerage.
If you have a brokerage account and are comfortable buying and selling in the securities market, a brokered CD can be lucrative, and a solid addition to your investment strategy.
On the other hand, if you prefer a straightforward, low-risk savings vehicle with guaranteed returns and fixed interest rates, a traditional bank CD might be a better fit.
Ultimately, the decision to open a brokered CD should be based on a thorough assessment of your financial situation, investment experience and your willingness to ride the ups and downs of the brokered CD market.
Final Take
For those seeking simplicity, direct control and a straightforward investment, bank CDs might be the better choice. However, if you are looking for higher rates, more flexibility, and don’t mind the additional complexity, brokered CDs could offer more advantages.
Ultimately, the best approach is to assess your financial goals, risk tolerance and need for liquidity. Comparing the rates and terms offered by both types of CDs can help you make an informed decision that aligns with your investment strategy. There’s no one-size-fits-all answer. The key is to choose the option that best suits your unique financial situation and goals.
Editor's note: This article was produced via automated technology and then fine-tuned and verified for accuracy by a member of GOBankingRates' editorial team.
