Brokered CD's Overview
You can purchase a CD not only from a bank, but also from a financial intermediary. Such a CD is usually referred to as brokered CD. There are some things you should learn on the way to purchase brokered CD's and get aware of the hidden traps they have.
Brokered CD's Characteristics
Brokered CD's have similar traits with traditional CD's but they also have some distinct characteristics.
Generally, brokered CD's are CD's offered by a professional, who has researched the market to find the best rates offered. Thus, if you decide to invest in a brokered CD you enlarge your scope of banks. In traditional CD's you work with only one bank, from whose options you can select.
Brokered CD's can be selected from different geographic locations. So, if the CD conditions in your area are not so favorable, through brokered CD's you can select options that have higher interest rates.
When you invest in a CD's through a bank, the latter considers profitability and decides on how much it will pay you. However, when you invest in a brokered CD the money you earn on the funds you have invested in the CD depends on the money that the intermediary wants to make from the deal.
Brokered CD's Fees
Intermediaries have different fee structures. Some may charge you a flat fee. Other may charge you a fixed fee per certain amount of dollars you have invested in the CD.
Another type of fee structure takes into account the assets under management. At times it is worth paying this money since the broker saves you the preliminary research on best rates as well as the renewals that may occur. However, make sure you know all the fees that you will be charged before making the investment to know whether it is worth paying it.
Brokered CD's Risks
There are several risks related to brokered CD's. They are as follows:
- Market Risk
This risk represents the possibility of selling the CD for less than you have actually paid for it. This risk is related to the secondary market. Thus, it is recommendable to sell the CD only after it has reached maturity. Nevertheless, the dynamics of the market increases the chances for a change in the initial plan. At the same time, the buyers in the secondary market may not be willing to buy your CD at its face value when the interest rates increase.
- Money Loss
In order to decrease the negative effects of this risk you should check whether the CD issuing banks are insured by FDIC.
Brokered CD's Sources
Some of the people that offer brokered CD's include:
- Financial consultants
- Financial planners
- Financial advisors
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