Brokered certificates of deposit (CDs), much like their name suggests, are CDs that a broker buys from a bank on your behalf. Adding a middleman can increase the annual percentage yield (APY) you earn on your cash, but it also means you might have to do a little bit more research before handing over your money.Here are a few things to consider before buying a brokered CD.
How They Work
Buying a traditional CD typically involves shopping around for the best interest rate offers from local institutions -- which is as easy as entering your ZIP code at BankingMyWay.com's CD section. But with a brokered CD, your broker does the shopping for you, and will look for the best interest rates offered across the nation instead of just in your backyard. Higher Rates
The average APY on a traditional 12-month CD is currently 1.6%, but brokered CDs tend to do even better. "A brokered CD can get you around 20 basis points higher than a CD you could get on your own," says Cliff Michaels, president of Institutional Investment Advisors Corp., a New York-based independent financial planning and investment management firm. (A basis point is one hundredth of one percentage point.) "But it depends on what deals are available when you go to buy the CD. Generally speaking, the best rates come from the same institutions, such as Capital One ( COF) and Discover ( DFS)."
What to Look For
As with traditional CDs, it's important to look beyond the APY when choosing a brokered CD. For starters, make sure the lender offering the CD is FDIC-insured and that the CD is not-callable. If interest rates drop, banks can redeem callable CDs -- thus negating the benefit of locking in a decent rate over the long term.
As with any financial transaction, it's important to stick with a reputable broker. A broker receives compensation for acting as middleman, generally through a fee already incorporated into the APY listed on the CD offer. Michaels recommends sticking with the larger, independent, transaction-based brokerage firms such as Charles Schwab ( SCHW) and Fidelity Investments. "They are supermarkets for brokered CDs," says Michaels. "And the transparency they offer gives you a very secure feeling."