Do brokered CDs have better rates?

As you expand your savings, you look to maximize your interest rates on every dollar you squirrel away. Among the many options for investing your money, you may want to explore brokered CDs.

What is a brokered CD?

Brokered CDs are certificates of deposit sold by financial professionals rather than banks. They can return a higher interest rate than CDs at your bank because the broker has many banks to work with. Like any CD, a brokered CD is a time-specified deposit. The bank you deposit your funds with pays a higher interest rate in exchange for your guarantee that you'll keep the deposit with them for a certain period of time. The term can be as short as one month or as long as five years.

Essentially, brokered CDs work the same way your local bank's CDs do. The only difference is that instead of choosing from the selection at just one bank, you're taking advantage of your broker's ability to shop around for the best rates at many different banks.

How can you buy a brokered CD?

You can buy brokered CDs through a brokerage, of course, but you don't have to have a brokerage account to get into the game. Your financial advisor can help you buy a brokered CD, as can a financial planner or financial consultant. Any financial professional who is equipped to shop around for securities can help you find and buy brokered CDs.

You buy and sell brokered CDs the way you would any other fixed-income investment; they can even be traded on a secondary market. Often, there are high barriers to entry: you may need to start with a minimum investment of as much as $10,000.

The better interest rates aren't free

As with any financial service, there are fees associated with brokered CDs. Your broker or financial advisor may charge you a flat fee for their services, or a fee per thousand dollars invested. These fees are normally modest, but they will reduce the return your investment.

The real "cost" of the CD comes out in your interest rate. Just as a bank sets their interest rates high enough to win your business but low enough that they still earn a profit, so too with brokered CDs. The financial professionals arranging the purchase and sale of your brokered CDs will give you an interest rate that lets them make a profit off the investment as well as you.

Having a professional search out the best rates and handle all the paperwork to buy and renew your CDs might well be worth a fee. Just be sure you know what fees you're paying, and check that the better rates are worth the additional cost.

On the other hand, it is quite easy to search online for CD rates from multiple banks. You may be able to find a competitive rate on your own, without needing to pay a financial professional to do the searching for you. To compare available rates with what your broker or financial advisor offers you, check CD rates on SavingsAccounts.com.

Pay attention to the risks involved

CDs are a great investment because they're low-risk. Like any savings account, a CD is typically insured by the FDIC. You can't lose any of your capital investment the way you can in the stock market, and your rate of return is guaranteed by the bank. You may earn a more modest interest rate than the returns you see on a big stock market win, but your money is safe and your interest rate is secure.

If interest rates rise during the term of your CD, you may face a quandary. With a brokered CD, you can sell your lower-interest CDs on the secondary market. It can be hard to sell them for full-value though, when the interest rate is low. Ideally, you'll use a CD ladder to keep your CDs maturing regularly, so you won't need to worry about this problem.

While most CDs are sold by FDIC-insured banks, there are some fringe organizations offering uninsured CDs. Even if you can get better rates, be sure to do your homework and be certain the bank you are doing business with is FDIC insured. One of the most attractive features of a CD is the low risk involved. Don't put your savings on the line with a shady bank.

Keep an eye on your rates

No savings vehicle is better than the interest rate it gives you. You may love your brokered CDs now, but it's still a good idea to review them once or twice a year, just like you do all your investments. Be wary of rates that continually slip. A small bump is one thing, but if your bank is falling behind the competition on interest rates, it's time to jump ship. Just because a brokered CD is right for you today doesn't mean it will be long term. Keep comparing interest rates and you'll get the most out of your savings, no matter type of account they're in.

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