Certificates of deposit (CDs) are low-risk, generally low-return investments that investors buy for a specified term at a guaranteed interest rate. During the term, the investor cannot access the money or penalties will be charged. Most CDs are purchased directly from a banking institution, but CDs are also available from financial intermediaries. These are called brokered CDs.

With brokered CDs, you can get a higher yield because “deposit brokers” shop for the best rates. While banks in your area may not be offering the best yields, with a brokered CD, you can take advantage of better deals in other areas. Additionally, deposit brokers often group investments from multiple investors to purchase a larger denomination CD. This is another reason for the higher yield because larger denomination CDs often have higher APYs.

Another way in which brokered CDs differ from bank CDs is that they can be bought and sold on the secondary market. If interest rates have fallen since you purchased a brokered CD, you may be able to sell your higher-yield CD for a profit (if the bank doesn’t call it). If interest rates have gone up, however, you may have to take a loss if you feel the need to liquidate.

In general, brokered CDs do not carry much more risk than bank CDs because at the core, they are bank CDs. When buying brokered CDs, however, there are some additional precautionary steps you should take to protect your investment including:

Checking the background of the deposit broker
Anyone can call themselves a deposit broker because there is no state or federal regulatory agency that licenses or certifies them. This opens up the possibility of fraud. Before handing your money over to a deposit broker, research the broker’s background http://www.bankingmyway.com/save/cd/finding-reliable-cd-broker to make sure there are no consumer complaints. The SEC provides information on how to “Check Out Brokers and Investment Advisors.” If you can’t find information on a deposit broker or you don’t like what you find, don’t buy the brokered CD. Either look for another deposit broker or consider buying a bank CD directly.

Find out which bank is issuing the CD
Brokered CDs have the same FDIC insurance protection as bank CDs, but it is important to identify the issuing bank for a brokered CD to make sure you are fully covered. FDIC protection is limited to $250,000 (until December 31, 2009) for each depositor at each bank. That means if you have other bank deposits at the issuing bank that bring your total deposits over the limit, you will not be fully protected.

Evaluate the broker’s record keeping
If there is a bank failure and you need the FDIC insurance benefit to recoup your money, the record-keeping habits of the deposit broker will make a difference in how fast your money is returned. It’s wise to get a copy of the title of the CD. While your name may not be listed on the title if there are multiple investors, the title should indicate that the broker is only a custodian of the title.

Ask about early withdrawal
When you have to cash out on a bank CD, you pay an interest penalty, but at a minimum your principle is returned. The same is not always true with a brokered CD. If your investment is part of a group investment, the broker may have to find a buyer before you can get your money out. That may require you to lose some of your principal. So be sure to do your research first.

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