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Watch out for high-yield CD fraud

By Claes Bell, CFA · Bankrate.com
Monday, June 4, 2012
Posted: 5 pm ET

If you're a CD investor desperate for a decent yield, you're probably not alone. CD rates have largely ceased to be a viable income investment these days thanks to record low yields, and that's squeezing seniors who rely on them to pay bills.

But that desperation is breeding recklessness in seniors and others, say state securities regulators in Pennsylvania. They're warning investors not to risk their savings chasing CD yields that are "too good to be true."

From the press release:

"The laws of economics haven't repealed because the economy went sour in 2008," says Securities Commission Chairman Robert Lam. "If someone legitimately promises high yield, it comes with significant risk.  The record low interest rates have created a fertile ground for people looking to separate people from their hard-earned savings."

The state securities commission, essentially the Commonwealth's consumer protection bureau for investors, has agents reviewing advertisements and online offerings every day that offer promises of high yields. "Our rule of thumb hasn't changed.  If the promised return sounds too good to be true, it probably is," said Commissioner Vince Gastgeb. "The truth is, though, that the bar of credibility has been lowered.  With bank account interest rates typically under 1 percent, a promise of 10 percent -- which seemed ho-hum a couple of years back -- sounds like an investment jackpot today to the soon-to-be retiree who's trying to build up a portfolio that took a 40 percent or 50 percent hit two years ago."

Commissioner Steven Irwin said the commissions' concerns extended beyond the temptations for older Pennsylvanians to move retirement funds from low-yielding fixed return investments to sometimes exotic and higher-yielding instruments that carry with them a much higher risk and volatility.

"Yield-starved investors may be more easily enticed into fraudulent schemes that can be cloaked as private placement offerings, promissory notes, securitized life settlement contracts and investments in energy, precious metals and distressed real estate, all of which are contained in the Pennsylvania Securities Commission's current list of Top Investor Traps," Irwin said. "But beyond that risk there is a growing list of outright cons and scams."

But that doesn't mean that all higher-yielding CDs are bunk. To tell the difference, Pennsylvania regulators have three questions investors should ask themselves before any money changes hands.

  • Are claims made for the investment realistic?
  • Has the seller given you written information that fully explains the investment?
  • Are the seller and investment licensed and registered in your state?

I'd add to that that if you're considering an exotic CD to try and boost your yields, it may be time to seek out a Certified Financial Planner or other fee-based investment professional to revamp your portfolio. Some of the investments they'll likely suggest, including dividend-paying large-cap stocks, may be riskier than a traditional CD, but at least you'll know what you're getting.

What do you think? What interest rate would you consider too good to be true these days?

Follow me on Twitter: @ClaesBell.

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