Q: I wish I could get a better rate on my savings account and CDs, but my minimum deposits aren’t large enough to get a higher rate. I’ve heard about brokered deposits, and I think they would help me earn more money. How do they work?

A: In a brokered deposit, an investment firm places a large amount of money on deposit with a bank. Like a certificate of deposit, the bank offers the broker a higher interest rate for leaving the money on deposit for a set period of time.

Like a mutual fund, a brokered deposit pools funds from several individuals to secure greater buying power. Mutual funds offer greater diversification, brokered deposits offer higher interest rates. Each brokerage client participating in the deposit receives shares equal to their investment. When the deposit matures, the interest is paid out pro-rata.

Brokered deposits are structured to take advantage of the FDIC insurance rates, offering clients secure savings and guaranteed interest at higher rates than they might receive on their own. In addition, the brokerage firm takes charge of shopping for the best rates, relieving responsibility for clients.

Brokered deposits gained some notoriety in the late 2000’s due to widespread disintegration within the banking industry. Since brokerage firms are loyal to their clients first, they rate shop more than other bank depositors. This may mean moving large amounts of money in and out of a bank within a relatively short period. Regulators fear that banks who rely too heavily on brokered deposits may prove less stable in the long term.