Are There Commissions on Brokerage CDs?

When individuals invest in certificates of deposit, the question of how fees – and even commissions – affect the rate of return often comes up. In some instances, there are no commissions to consider, but often, there are. Commissions are most common in brokerage CDs, which is why it’s important to learn about them before investing.

What You Should Know About Brokerage CDs

There are some significant differences between brokered CDs and those offered solely through banking institutions. One difference is that these certificates of deposit, while being offered through banking institutions, are not actually representative of the bank. Instead, the broker firm is purchasing them from the banks in large denominations and reselling them to customers in smaller chunks.

In doing so, it possible for the broker to offer a higher brokerage CD rate to customers. Also, because the CDs can be resold before the maturation period ends, customers can take advantage of brokerage CDs due to greater liquidity.

What about Those Commissions for Brokers?

With the benefits that come with brokerage CDs, you’re probably wondering what the brokerage firm gets out of the deal. One benefit for them is possible commissions for brokers. This often occurs because broker firms don’t actually issue certificates of deposit. Instead, they “broker” them, meaning any CD purchased through them is actually traded like a bond, thus entitling them to a commission.

While the commissions for brokers often don’t affect you, sometimes they can. This is especially true for your yield to maturity (YTM), which is the rate of return anticipated if the CD is held until the maturity date. Due to the commission, you may be paid the predetermined amount of interest promised at first investment but your YTM could be materially lower.

When deciding whether to go with the traditional CD or brokerage CDs, every aspect should be taken into account – including commissions for brokers. Before you make any investment in one, you should know what to look for in a brokerage CD to earn the greatest rate of return.