I recently added some brokered CD options to our Best Savings Accounts list and thought it worth a quick write-up about these accounts. Often the best traditional CDs will have the highest rates, yet recently the brokered CDs rates seem to be running highest.
Brokered CDs are much like traditional CDs purchased through a bank, except that these are purchased through a brokerage account instead, through the likes of Fidelity, Schwab, Vanguard, etc. You’ll buy and manage the CD from within your brokerage account and the funds are held by an outside bank. When purchasing the CD, the brokerage will offer a list of rates from various banks and you’ll choose one to buy.
Many or all of these banks are FDIC insured, just double check on the institution before completing the purchase. In fact, buying brokered CDs allows you to keep tabs on all of your funds in a single brokerage login, all while holding CDs across multiple financial institutions. This is favored by larger investors as an easy way to bypass the $250,000 FDIC limit through CD purchases of $250,000 per bank at multiple banks.
These CDs can be purchased in various lengths from as little as a 1-3 months to as much as 10+ years. Be sure to note whether the brokered CD is a standard CD or a ‘callable’ CD. The latter will usually offer higher rates, but it allows the bank the option to close out the CD earlier than the time allotment. You’ll still get your full interest rate for the months deposited, but you lose the lock-in length should the bank decide to call the CD. The standard ‘non-callable’ CD is fully locked in like a traditional bank CD.
Brokered CDs never automatically renew, and the funds + interest will be deposited into your brokerage settlement account. An interesting feature of brokered CDs is that you have the ability to resell them midterm on the secondary market. A traditional bank CD can usually be broken midterm with some kind of penalty from the bank; with brokered CDs you can sell it off at whatever the going rate is on the secondary market if you don’t want to keep it to term.
There is no cost to buy new issue brokered CDs with Fidelity, Schwab or Vanguard. (Purchases and sales on the secondary market will incur a fee.) You’ll find the CDs within the brokerage login either under a ‘Fixed Income’ tab or a ‘Certificate of Deposit’ option or something similar.
Brokered CDs are sold in $1,000 increments with a minimum $1,000 deposit and maximum of $250,000 per purchase. If you want to try out brokered CDs, you can easily buy a small $1,000 CD for a short 3-month term to test the waters. Feel free to discuss further in the comments below.
I bought some of these (new issue) Brokered CDs for the first time recently. I noticed that a lot of the same ones appear at several brokerages. They seem to currently have the best rates for parking safe cash for a few years.
One point is that since these each have a CUSIP number (unlike direct bank CDs) you can ACATS them between brokerages if you are chasing bonuses.
What are the interest rates like?
If you are interested in new issue brokered CD’s, I suggest checking the list at your brokerage firm often – at least daily. I use two different firms for this product and have seen many times when an attractive new offer is posted, it can be gone in one day, or sometimes just hours.
Also, if cash flow is a consideration, note how often the interest payments are made. They may be monthly, quarterly, semi-annual or at maturity (for shorter term CD’s).
I did not know that. That is really good for those short term 3 month type bonuses. The money could be in a 3-4 month CD with a locked rate.
The best rate doc site says Schwab has brokered CD’s up to 5.7% for 10 to 18 months. I don’t see anything on Schwab higher than 5.1% for 0 to 24 months. Am I not looking at it correctly?
Because the latest rates have dropped significantly. The data in the post is dated in many places. Weeks matter with material news (Dec Fed meeting and Powell’s commentary).
FYI they let you buy them in 1k increments but you’ll need significantly more to sell. I have one that requires 10k to sell them and another requiring 20k. Maybe it was in the fine print and I didn’t see it but I think that’s bs.
Don’t sweat it, when you’re swapping out Depends and gluing in your dentures you might have enough to cash it out.
I invested $4k into a new issue 4.7% CD on Schwab on Friday. The value is currently down $8.48. Obviously that’s an insignificant amount, but I don’t understand how a CD loses value. Can someone explain or point me in the right direction?
You purchased a brokered CD. Brokered CD’s have market risk – bank CD’s have early withdrawal penalties. Neither of these matter if you hold the CD till maturity. If you own a bank CD (or credit union share certificate), and decide to cash it in before its maturity date, you will receive back your original amount less an early withdrawal penalty, which is normally several months worth of interest. If you decide to cash in your brokered CD before its maturity date, it is a different process. You place your CD for sale on the secondary market – its vale is determined mostly by what the now current interest rate is on a newly issued CD with the same duration as what remains on your brokered CD. If you plan on holding your brokered CD till maturity, don’t fret over its fluctuating value because you will receive back your entire amount when it matures.
Very thorough–thanks!
might be worth an update…rates for brokered CDs are now ~4% for 6 months CDs. Is there a list of which brokerage firm allows Brokered CDs?
Have never seen a list, but if it were my money, I would use one of the well known and respected brokers such as Fidelity, Vanguard, Merrill, Schwab, Ameritrade, etc. Make sure you are purchasing a bank issued CD that comes with FDIC insurance. Note; for products with short-term durations, you may do better with treasuries. Short term treasury interest rates are currently slightly higher than CD’s and there is the advantage of no state income taxes on the earned interest.
I am bit confused about brokered CDs. So the article says that they are in increments of $1000. So if I look at Fidelity’s website and it says “quantity available” of 25,000, and if i decide to buy 10, that means I am buying $10K CD worth?
I just bought some at Vanguard, they do not allow fractionals. I could only buy in increments of 1k.
Is it possible to buy CDs or any other investment vehicle with a visa/master gift card?
Some brokerage firms might allow you to link the card to your account and then use the it to purchase securities? Would probably be easier to just sell the gift card for cash, and then use the cash.
Thanks for your advice! Do you know if any brokerages that allow this?
No, I have never looked into it.
Not a good time to buy CDs. The fed is going to keep pushing the rates up. All these banks are pushing hard to lock people into CDs right now. I think late this year or early next year would be a better time. I’m going to stick my IRA into some of these via vanguard.
Etrade has US Treasury bills in the same bond section that seem to have similar or better returns than the brokered CDs. Any drawbacks to those?
No drawbacks that I can think of. Right now, short term treasury yields seem to be higher than brokered CD’s. As the durations get longer, the brokered CD’s yield more than the treasuries.
No drawbacks. And remember, the treasuries are generally exempt from state and local taxes. Consider that when comparing CD’s to treasuries.
Can anyone explain how the value of these go down? I just purchased $20k of brokered cds from Merrill (no fees for purchasing) yet the next day the account balance is showing $19,996. How did it lose $4? Is that just the market price and I’ll still get principal + interest at maturity. Maturity is in about a month or so if that matters.
Yes, yes and yes. The $19,996 is the market price, even though it is unlikely there would be a buyer. As it gets closer to the maturity date, the value will get closer to your purchase price of $20,000. At maturity, you will receive back your $20,000 plus any earned that had not previously been paid to you. These market prices can move in both directions. If interest rates on new brokered CD’s of the same duration would go down, the market value of yours could go up.
Thanks for the reply. That’s what I thought but just wanted to be sure. Was a bit alarming purchasing these for the first time and it immediately going down in value.
You are welcome. Glad I could help. BTW, I purchased two different ones this morning. They posted to my account after market close. One was down .015% and the other down .020%.
I would not lock up money for 20 years. I would rather invest in commodities or real estate that should move up as dollar continues to inflate. Money can double after 20 years but who knows what the dollar will look like by then.