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Beware misleading CD offers

By Claes Bell · Bankrate.com
Tuesday, September 11, 2012
Posted: 9 am ET

Life is tough for fixed-income investors right now. Rates on riskless assets like CDs are at historic lows, and the search for yields has made it easier for misleading and outright fraudulent CD offers to get a nibble from investors.

That's especially true of fixed-income investors who have big bonds or CDs that will soon mature, taking their anachronistically high yields with them. When you're looking at an immediate, substantial reduction in monthly income, you're prone to taking high-yielding offers without paying too much attention to the details.

There's a pretty small chance someone's actually offering a legitimate CD yielding 7 percent.

A 7 percent yield on a legitimate FDIC-insured CD? Don't bet on it. (Photo by losmininos.)

Last week, Gail MarksJarvis of the Chicago Tribune fielded an inquiry from a reader in just that situation, wondering about whether she should sign up for a CD yielding 7 percent being advertised in her local paper.

Here's what MarksJarvis had to say.

(A) 7 percent interest might apply to maybe the first $500 you invest along with another $19,500 in a $20,000 CD. And the 7 percent teaser rate on the $500 might evaporate after a short time -- maybe six months -- though your $20,000 must stay invested much longer.

The product you've seen advertised might not be a CD at all. Notice the wording: "Attention CD owners." This merely means they are preying on CD owners who are frantic for interest income.

Lately, seniors have been lured by so-called structured products that sound safe because they use "protection" or "guaranteed." But the products are just the opposite. The investments are often risky, and a guarantee might apply to only 10 percent of your money, if anything. Further, you might be required to leave your money invested in the risky investment for 10 years even if it is turning worrisome or you need to withdraw it for a medical emergency.

Brokers might make structured products sound mild-mannered, but this is often because the products are so complex even those selling them do not understand them. These products are definitely not a CD substitute. CDs, after all, are simple and completely guaranteed if they fall within a bank's FDIC protection of up to $250,000 per depositor.

MarksJarvis is dead-on here. Ask yourself, why would a financial institution offer a yield that high? With the average 5-year auto loan rate at 4.38 percent and the average home equity line of credit at 5.17 percent, what exactly would the bank be doing with your money that would justify paying you a risk-free 7 percent yield?

There's nothing wrong with searching for above-average CD yields to get the best possible return on your money, but a legitimate CD with a yield that's three times higher than the best CDs in Bankrate's database is vanishingly unlikely. Instead, it's probably some sort of a bait-and-switch offer, a risky mutation of a regular CD, or some kind of annuity that in no way resembles an FDIC-insured certificate of deposit.

Instead of throwing money at any questionable company that purports to offer help for beleaguered CD investors, a better option is to pay a few hundred bucks to visit a Certified Financial Planner or other fee-only financial planner. They may not have any magical ultra-high CD yields to offer, but they may have some reality-based advice to seniors worried they'll outlive their money in the current low-rate environment.

What do you think? Is a 7 percent CD yield too good to be true? What have you done to adapt to the low-rate environment?

Follow me on Twitter: @ClaesBell.

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