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Brokered Certificates of Deposit (CDs) Differ Than Regular CDs

Brokered Certificates of Deposit (CDs) Differ Than Regular CDs

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Brokered certificates of deposit (CDs) are a different animal than regular bank CDs. Even if you have invested in CDs for years you probably don't understand how different brokered CDs are if you never invested in one. With a regular CD you figure out the term you want to invest in, then go out and compare CD rates. Brokered CDs are more complex and carry some risk that regular CDs don't.

The biggest difference being if you decide to invest in a CD, go out and purchase one then decide you need access to your money sooner you might lose some of your principal investment. Why? Because the broker won't buy back the CD, you have to try and sell the CD in a secondary market which isn't really that liquid.

Investment Tip: Before you invest in a CD use a CD calculator to figure out how much money your CD investment will return.

When you open a regular bank CD or credit union CD the financial institution you open the account with is issuing you the CD. With a brokered CD the broker is reselling a CD the broker bought from a financial institution. This can make for another unwanted situation so you need to identify the issuer of the CD, which is different from the broker you are buying the CD from.

For example, say you have $250,000 deposited at Bank of America. Now let's say the broker you are opening a brokered CD with bought the CD from Bank of America (issuer). You deposit another $100,000 into this brokered CD. Now you have $350,000 deposited at Bank of America. The FDIC puts Bank of America into receivership which means the bank has failed. You're $350,000 deposit is over the FDIC insured max of $250,000, you lose $100,000.

You can buy a brokered CD from a well known company like Charles Schwab, Fidelity or other investment companies. If you decide to buy a brokered CD from a company you never heard of before you will need to do a background check. Unfortunately deposit brokers do not have to go through any licensing or certification process. There are no state or federal agency that licenses and examines these companies.

Identify the Issuer – Because federal deposit insurance is limited to a total aggregate amount of $250,000 for each depositor in each bank or thrift institution, it is very important that you know which bank or thrift issued your CD. In other words, find out where the deposit broker plans to deposit your money.

Your deposit broker may plan to put your money in a bank or thrift where you already have CDs or other deposits. You risk not being fully insured if the brokered CD would push your total deposits over the $250,000 federal deposit insurance limit.

Now that you have a better understanding of brokered CDs you can go out and search for the best brokered CD rates. Personally I think you can get higher CD rates directly from a bank or credit union without the risks. You can compare the best CD ratesright here at ratesorama.com.
Author: Stacy Everest
October 18th, 2011