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FDIC warns on structured CDs

By Claes Bell, CFA · Bankrate.com
Monday, May 21, 2012
Posted: 12 pm ET

Structured CDs have been gaining in popularity as a way for risk-averse investors to participate in the gains of the stock market and beat the tepid conventional CD rates available in the marketplace right now. But despite their name, structured CDs have a number of fundamental differences with conventional CDs.

In its spring Consumer News publication, FDIC experts had some words of caution on structured CDs. The whole piece is worth checking out, but here are some of the highlights from the banking experts at the FDIC:

  • “If the new CD combined with your existing deposits at the same bank would put your total bank deposits above the $250,000 FDIC basic insurance limit, you may need to take steps to make sure all of your deposits are fully protected,” explained Jan Templeman, an FDIC Consumer Affairs Specialist.
  • "Remember that the FDIC does not license or register deposit brokers and that an unscrupulous broker could mislead or defraud its customers," explained Martin Becker, an FDIC Senior Deposit Insurance Specialist. "If the broker fails to place your funds into a CD at an FDIC-insured bank, your money will not be insured by the FDIC. Also, be sure to review the account agreement and other supporting documentation to confirm you are in fact purchasing a CD and not a financial product that is not insured by the FDIC."
  • "You may find that your share of any uptick in an index will be limited to a certain percentage and subject to a maximum cap," said Meron Wondwosen, an FDIC Consumer Affairs Specialist. "For example, it's possible for the market index to increase by 25 percent but your actual return on the CD may be only 10 percent."
  • "Market-linked CDs are not suitable for all consumers," Becker concluded. "If you are confused about the terms and conditions offered under the product and you are unclear or uncomfortable about the risks you are assuming, a conventional CD might be better for you."

These points echo some of the ones I covered in a Bankrate feature a few months ago. While there might be some good structured CDs out there, their complexity, hidden fees and uncertain return mean they have little in common with conventional CDs.

At least with buying a mutual fund or an individual stock, you know you're buying an asset with some risk attached. In an effort to share in the returns of the stock market without losing principal, investors in structured CDs may find risk where they least expect it.

What do you think? Would you invest in structured CDs?

Follow me on Twitter: @ClaesBell.

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1 Comment
Matt
May 24, 2012 at 2:58 pm

Claes, I believe that structured CDs can provide a valuable alternative in a customer's total portfolio. It's important that those selling the products have a solid understanding of what the return potential and limitations are and equally as important that they are able to explain to their customers.

You mention that "At least with buying a mutual fund or an individual stock, you know you're buying an asset with some risk attached"...that risk is the complete loss of principal. In a MLCD, the risk of principal loss is eliminated, balanced by a limited upside.

It may not be fair to compare MLCDs directly to a standard CD, individual stock, mutual fund or other traditional investment. This is a product which, for many savers/investors, provides the security of knowing their principal is protected (up to FDIC limits) with a potential market return. Is the return guaranteed?...no. But neither is a stock or mutual fund where I could wake up one day with my initial investment lost.