Direct CDs vs Brokered CDs – Making a smart choice

<h2> Direct CDs vs Brokered CDs – Making a smart choice</h2>

CD or a Certificate of Deposit is a time deposit account with a safe investment option and a fixed rate of interest. It is also known as a Direct CD because directly issued by the bank through a branch or the respective online website or mobile application. When you open this kind of account with a bank or any financial institution, you are liable to secure your money for a fixed period, and when you redeem the same during maturity, the issuer offers you a predetermined interest along with the principal amount. The most significant benefit of this type of account is beholding an effective cash management strategy along with competitive yields and the benefit of FDIC insurance protection.

With a CD account, the investor is open with three options:

  • You cash out the principal amount and the interest at maturity.
  • You cash out the amount before maturity and are liable to pay the withdrawal penalties. You also tend to lose interest on your saved amount.
  • You do not intimate the bank for withdrawal, or if you do not cash out the deposit at maturity, the bank automatically renews or rolls over your deposits to a new CD for the same period but with the current rate of interest. For a new CD, your principal amount becomes a total of your previous deposit amount and the accumulated interest.

The Changing Trend

The trend of using a traditional Certificate of Deposit is taking a new transformation with more flexibility, getting access to higher returns, and accelerated benefits. With this transformation, banks and financial institutes are offering various other types of accounts like:

  • Bump-up CD
  • Callable CD
  • High-yield CD
  • Liquid CD
  • Zero-coupon CD
  • Brokered CD

With so many CDs to discuss and compare, in the article, you will learn the differences and know the comparing essentials of a Direct CD vs. Brokered CD.

What is a Brokered CD

Brokered CD is a certificate of deposit issued by any financial intermediary associated with various financial institutes or brokerage firm. In this type, you need to pay an extra fee to the brokerage for handling your effort of opening an account and maintaining the same with the desired firm. However, the additional fee that you pay is included in the annual percentage yield that you pay every annum. The best part is that this account can easily be diversified among various banks with a limit of $250,000 per investor per insured bank and this way you are conveniently able to spread out your risk of investment. Another unique feature of this account is that you can buy and sell the brokered CD or even do trading similar to any other fixed-investment or share trading.

When comparing the two types, there are certain similarities and specific differences. Let’s take a look into the essentials of both the Brokered CD and the Direct CD.

Similarities of the Direct CD and Brokered CD

  • Both the accounts pay a fixed interest rate relatively higher than a regular saving account
  • At maturity, you get the accumulated interest along with the principal amount
  • FIDC insures both the types with a coverage limit of up to $250,000 per issuer per investor
  • Both the types of CDs are debt responsibilities of the issuing bank

Differences between Direct CD and Brokered CD\

  • Traditional CDs or bank CDs have short-term investment option whereas brokered CDs can have short to long-term investment to as long as 25 to 30 years.
  • The rate of interest for a direct CD is accumulated and paid at the time of maturity whereas in case of brokered account you can opt for periodic payment of the accumulated interest
  • The risk factor with bank or direct accounts is comparatively lower than the accounts opened through brokerage firms.
  • Risk of fraud is lower with direct accounts as compared to brokered CDs. The lower risk of fraud on direct accounts is because the brokerage firms do not need any certification or license as a proof of identity and authenticity, hence leading to a high rate of fraud.

To sum up, in a few words, it is utmost important to understand and know the depths of both the accounts before investing in a specific certificate of deposit.