What’s the difference between brokered and bank CDs?

By Sabrina Karl

Certificates of deposit are a bank product, but did you know banks aren’t the only places to open one? In fact, if you have a brokerage account for your retirement savings or other investments, you might have noticed CDs being offered there as well. So are brokerage and bank CDs different?


The answer is both yes and no. The CDs you can open at a place like Vanguard or Fidelity are called “brokered CDs”, and they are indeed issued by a bank. But there are some important differences you’ll want to understand.


The primary advantage of brokered CDs is convenience. On the front end, you can open numerous certificates at various banks all within your brokerage account, saving you the trouble of establishing relationships with individual banks.


It also simplifies recordkeeping, since all the certificates appear together on your brokerage statement, along with maturity dates, regardless of how many banks’ CDs you access.


But as with most things, convenience comes at a price. Although brokered CDs are occasionally competitive with the top bank rates, usually you’ll earn less with brokered CDs. So you’ll have to prioritize between maximizing your return versus simplifying your process.


In addition, bank CDs always stipulate an unambiguous early withdrawal penalty, which you can calculate with basic arithmetic. Not so with brokered CDs, where exiting early requires you to sell the CD on the secondary market. Although your brokerage makes the selling process easy, you’ll enjoy no guarantees on a minimum price, even leaving your initial principal at risk.


For those chasing the highest returns, direct bank CDs are the way to go. But if you have little appetite for opening the necessary bank accounts yourself, and feel confident you’ll hold the CDs to maturity, sacrificing some return can make your life a little simpler.