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Brokered deposits are sums of money invested into a bank for a specific time period by a brokerage firm. These deposits, similar in design to a certificate of deposit (CD), are time-sensitive in that they require the funds to remain with the broker for a specific length of time. Brokers generally accumulate large amounts of different deposits from customers, package them together and sell them to a bank for use by the institution. When the time period ends, the customers can retrieve their money with interest. Brokered deposits are insured by the Federal Deposit Insurance Corporation (FDIC) and thus are considered to be basically risk-free investments.
There are a number of features involving the individual deposit broker and its rate of return that customers should be made aware of. Generally, the larger the principal investment, the higher the interest rate. This is also true for the longer an investor remains committed to the deposit. In addition, the smaller the broker, the larger the return. Fewer deposits are packaged by the smaller broker houses, sold to the larger firms for packaging with additional deposits and ultimately sold to the banks.
Typically, brokered deposits requires a minimum level in order to establish a fund. Like all deposits, however, this is subject to the standard insurance levels of the FDIC. Customers can choose to receive interest payments over the course of the investment or in a lump sum at the end of the time frame. The benefit of retaining the interest in the brokered deposit is the fact that the interest becomes compounded, resulting in a larger payout at the end.
A person investing into brokered deposits can withdraw the money early for the cost of a penalty, usually around six months of interest. Upon maturation, the investor has a window of time in which to cash out the deposit. However, if the investor fails to do this during the time period, the broker generally rolls the money into another collection of deposits.
Brokered deposits differ from a traditional CD in that they are packaged for banks. The brokers themselves organize the large-scale deposit and issue it to the bank as a collection of funds. In the event that one of the investors withdraws the money early, the broker must either attempt to resell the deposit to another customer or take a loss on that particular portion. Those brokers in charge of the deposits are not required to obtain any licensing by either state or federal agencies.
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