With the wide assortment of investment instruments available, knowing the specific terminology can be incredibly helpful especially when it comes to preventing costly mistakes. There are several nuances to certificate of deposits that are available and being aware of all the differences is the first step to making educated investment decisions. One such deposit to be aware of is a brokered deposit, because although it is similar in behavior to a traditional certificate of deposit, there are unique characteristics you should be aware of.
Brokered deposits are CDs sold directly by brokerage firms. The deposit brokers (the specialists handling the brokered deposit investment tools) can often get a higher rate of return for the CD by committing to a minimum level of overall deposit value being brought to the brokerage firm. The brokered deposit, large denomination that is broken down into smaller pieces, is then sold to customers by the brokerage firm as an investment opportunity on behalf of the banks to increase their customer base.
A main distinction between a brokered deposit and a traditional CD is that once the CD is distributed by the brokerage firm it is not backed by the FDIC insurance protection. Many investor may feel comfortable taking the risk as there will be a higher yield on a brokered deposit than on traditional CDs, but that is the exchange for accepting a higher risk courtesy of the lack of Federal protection.
When it comes to investing, it is important not to make assumptions of any type, especially when it comes to the risk associated with a brokered deposit. If you are considering investing into a brokered CD, make sure to conduct a thorough investigation of all the text that supports the product. You are responsible for reading all the disclosures associated with the brokered CD so you need to be educated on whether or not you may qualify for FDIC protection if you need it.