For investors in search of relatively low-risk investment strategies, certificates of deposit (CDs) may offer potentially higher yields than some high-yield savings accounts and money market funds. But what about brokered CDs? What role might they play? Let’s take a closer look.

As an RBFCU Investments Group financial advisor, Caleb K. Johnson works daily with clients exploring investment management and retirement income strategies. He often receives questions about whether bank certificates of deposit (CDs) or credit union share certificates remain appropriate investment solutions.

“Historically, these products have been popular with people who have a minimal tolerance for risk, especially since CDs and share certificates typically offer higher interest rates than traditional savings accounts. Plus, they’re backed either by the Federal Deposit Insurance Corporation or the National Credit Union Administration, respectively,” Caleb said. “For many investors, the backing of the FDIC and NCUA feels reassuring.”

Another advantage? CD and share certificate interest compounds daily or monthly, making them easy solutions for the average investor to see progress.

There are potential downsides, however.

“You can be locked into a lower rate for months or years,” Caleb said. “And, if you encounter a true financial emergency and must withdraw your funds, the withdrawal penalties can be steep. Also, CDs may be called prior to maturity when interest rates are declining.”

One option to explore? Brokered CDs are available through an existing or new brokerage account with a brokerage firm.

In fact, an RBFCU Investments Group financial advisor can help you determine if a brokered CD is right for you. If you choose to work through them, the money is placed into a third party financial institution’s CD with a potentially higher annual percentage yield (APY).

An advantage of brokered CDs? If you must withdraw money before maturity, you could sell it on the secondary market and avoid an early withdrawal penalty. Still, there is a risk since brokered CDs may lose value when sold prior to maturity. Partial cancellations are also possible.

Indeed, as with any investment product solution, there are multiple fine points to consider with brokered CDs.

For instance, interest does not compound but is calculated using a simple interest calculation and can be paid out monthly, quarterly, semi-annually or at maturity.

Yet clients may have more options to select from since brokerages are able to source from multiple issuers. Because the FDIC and NCUA only insure up to $250,000 per person per bank or credit union, brokered CDs purchased from multiple issuers may provide a potential way to invest more money while keeping your funds insured — provided the issuing bank or credit union is covered.

But brokered CDs might come with higher transaction costs. Before maturity, they also may be sold on the secondary market, which could result in a net loss.

“Many people continue to regard CDs and share certificates as cornerstones of their financial strategies. As such, they can be anchors for someone’s financial well-being alongside other solutions such as brokered CDs, market linked CDs and money market accounts,” Caleb said. “Which options are appropriate for someone? It depends upon an investor’s goals as well as their risk tolerance level. In the process of exploring their needs and goals together, we may identify other viable strategies. That’s what I love about being a financial advisor, helping members and clients chart a course that fits their objectives.”

Curious to grow more confident about your investment strategies and solutions, including brokered CDs? Let an RBFCU Investments Group financial advisor help you explore your options and review your financial plan. Get started today with a no-cost, no-obligation initial consultation.