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4 percent rate on 6-month CD? Nope

By Claes Bell ·
Monday, May 23, 2011
Posted: 7 am ET

In low-rate times like these, nothing gets CD investors' attention quite as quickly as an ultra-high CD rate. It's true that many legitimate institutions, including some on Bankrate's CD rate tables, offer CD rates significantly higher than the national average. But sometimes shady financial providers use eye-catchingly high CD rates to lure in investors, only to pull a bait-and-switch and try to sell them on something riskier.

Allan Roth of CBS MoneyWatch has a blog about the reappearance of a CD bait-and-switch scheme he encountered in Denver earlier last year:

More than 15 months ago, I wrote about a 3.45 percent APY CD that was too good to be true. I knew it was too good to be true because when I went to buy it, I learned that no such CD existed. American First Assurance Nexity Bank claimed they were a broker representing the five-star-rated bank. In reality, Nexity Bank disavowed having any relationship whatsoever with American First Assurance, which turned out to be a one-star-rated bank that recently was shut down by regulators. What they were actually doing was suckering consumers into coming in for the CD and walking out with an insurance annuity or two.

Insurance annuities such as Equity Indexed Annuities are complex instruments that promise stock market returns without risk. In reality, they don’t deliver and are filled with tricks. Equity Indexed Annuities have developed such a bad name that the industry has attempted a name makeover.

Roth writes that despite an investigation into the company by the Colorado Division of Insurance, the company has since doubled down on its scheme:

CD rates have plunged over the past 15 months, yet that has not proven to be the case with American First. In fact, the 3.45 percent CD that was too good to be true is now replaced with this 3.95 percent APY advertisement taken from the May 1, 2011, Colorado Springs Gazette.

There's no denying the allure of 3.95 percent APY on a 6-month CD right now, with the Bankrate average for a 6-month CD hovering around 0.27 percent APY. But a yield that's nearly 15 times higher than the prevailing CD rate for that maturity should raise some red flags.

That's not to say CD investors shouldn't chase yield, but be careful where you're looking. If you ask about a CD rate, and the institution equivocates or says the rate isn't available, the conversation should end there. Nothing good can come of handing your money over to an institution willing to play bait-and-switch games, no matter how good the deal they're pitching sounds. You can do a "background check" on prospective banks using Bankrate's Safe & Sound Star Ratings.

Have you ever been promised a CD rate, only to have the bank pull a bait and switch?

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May 25, 2011 at 7:31 pm

The same caveat applies as usual - read the fine print. Your local banks and credit unions are usually the best bets for a great "teaser" CD rate. Great rates are offered with the hopes that you'll stay on using another one of their services. I just obtained a 4.00 APY for 4 months from a local source. A relative of mine was 1 day late from the promotional rate expiration. Sometimes you snooze, you lose.

Dennis Miller
May 24, 2011 at 7:22 pm

What Mr. Roth encountered should be illegal and is the worst of the worst regarding marketing any financial instrument(s). Bait-and-switch tactics are without a doubt deceptive and cause distrust to infiltrate throughout the financial marketplace. There are "Bonus CD's" that promise to pay 4.65% APY for 6 months but have investment limits because the company offering the "Bonus" loses money on each person that takes them up on their offer. In many cases, it is very difficult to actually get the offering company to honor appointments once they know that your intention. The representatives have a "fiduciary" responsibility to their clients, but I fail to see how that fiduciary responsibility is honored when there clearly is a conflict of interest.

Regarding the comments of Mr. Bell about Equity Indexed Annuities (EIA's), like anything in life, there are some that are not as desirable as others. But generally speaking, Equity Indexed Annuities which are now more appropriately called Fixed Indexed Annuities (FIA's) provide safety, growth, creditor protection, and bypass probate. They also provide a guaranteed income for the rest of a client's life that can grow, which protects the client's purchasing power. Most of the misinformation regarding FIA's comes from the banking and/or securities industries. Why? Because these products do work as advertised and the insurance industry is taking billions of dollars away from risky mutual funds. Brokers are not at all happy about it and have actually lobbied Congress to pass legislation requiring an insurance agent to become securities licensed in order to offer FIA's that cannot lose a single penny. This is a case of Wall Street trying its best to protect its "nest". The detractors to FIA's also claim that the insurance agents make exorbitant commissions but fail to include in the very same breath that the client never pays a single red cent of that commission. Whereas, clients pay annual fees to their brokers whether they make money or not. So, the very easy thing to categorically say is that FIA's are confusing, "they don't deliver and are filled with tricks" without explaining or verifying what product they are referring to or where they get their information.

I will also submit that FIA's are not for everyone but if you are older, risk adverse, want guaranteed growth followed by guaranteed income until death or your spouse's death, then a FIA may be exactly for you.

I will gladly respond to any legitimate concerns or comments.