Bank CDs vs. Brokered CDs: What’s the Big Difference?

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.

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. transaction, selection, costs, potential benefits, and risk.

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.