Basics of a brokered CD

A certificate of deposit that is offered by banks through an agent or a broker is called as a brokered CD. The investors will not be able to connect directly with the issuing authorities; instead all dealings are made through either the brokers or the intermediaries.

Instead of searching the best certificate of deposit for investing, another person on your behalf namely a financial advisor or a broker surveys for the best available CD in the market.

A brokered CD has got some unique features when compared to other type of CDs. First thing being, the broker educates you with the wide variety of banks offering certificates of deposit accounts. In an alternate situation, you have to walk up to a bank and enquire the availability of different CDs and its features. When brokered CDs are used, you can invest in any CD available from a variety of locations without spending time on personal enquiries with the bankers. This is great advantage of this type of CD because some of the local banks may not accept more deposits to maintain the deposits at a lower rate.

Brokered CDs can be availed from financial advisors, financial planners, financial consultants, brokers, agents, etc., Instead of shopping around for a prospective certificate of deposit you can probably find a broker dealing with these securities.

All brokered CDs are associated with a typical cost called Annual Percentage Yield that is earned on the invested amount. The banks do not charge any fee for investing in certificate of deposit. Generally the rate of interest offered with any certificate is determined by the issuing authority and the type of deposit. But with this method, the Annual Percentage Yield will be determined by the intermediaries, i.e., the brokers. After the commission earned by the brokers on their deal, the interest amount or rate of interest is fixed. However, the rates charged by the intermediaries are generally nominal. Sometimes the investor needs to obtain a token and wait until their order is placed by the intermediary towards investing in certificates of deposit. Payment of the brokerage fee for availing certificate of deposit is always reasonable.

However, a major risk is associated with the brokered certificate of deposit namely market risk. When the rate of interest gets declined, you may have to sell the same in the secondary market for lesser price than you paid towards investment. But still the risk can be eliminated by holding it until maturity period.

Another risk associated with this type of CD is that you may lose money if you invest the money in a fluctuating certificate of deposit without getting complete details from the broker. Before investment, the details of the broker through which the deposit is offered should be examined. Moreover, it should be ensured whether the issuing banks are safe and the deposits are covered with FDIC. A broker may get you the attractive certificate of deposit with high rate of interest and along with unseen risk factor.