Make a Safe Investment With Brokered CDs

In today's difficult times, finding a decent return and some safety in your cash investments isn't easy.

Certificates of deposits can be an ideal vehicle because they're simple, safe and stable. They almost always offer better interest rates than savings accounts, and they're almost always backed by FDIC insurance.

Problem is, rates aren't impressive at the moment. That's partly because so many investors have fled risk, and partly because banks, which use CD deposits to fund loans, aren't issuing many mortgages. The average annual yield on a six-month certificate of deposit with a $25,000 minimum recently stood at 2.05%, and money market rates were less than 1%, according to BankingMyWay.com.

Brokered CDs provide a potential solution. These CDs are offered by brokerage houses such as Fidelity, Vanguard and Charles Schwab, which scour the country for the best possible interest rates. They have two distinct advantages over bank-issued CDs: the potential for higher yields and greater liquidity. But as savvy investors know, the chance for better returns typically comes with increased risk, and brokered CDs are no exception.

Here's how they work: Banks shore up deposits by entering deposit agreements with brokers. The bank issues large-denomination CDs to the broker, which essentially breaks the large CD into small pieces for sale to customers. (Bank CDs, on the other hand, are issued directly from bank to customer, in the amount invested.)

Better Rates

Brokers' CDs often offer better rates than the ones at your local bank. For example, in early November, Vanguard offered a six-month CD at 3.1%, with a minimum investment of just $100. Compared to the national average, that 0.81% could make a big difference, amounting to $405 over six months on a $100,000 CD.