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The search for yield has gotten a little nuts. CD rates keep dropping -- as do Treasury securities. The Wall Street Journal reported Friday that Treasuries hit a record low of 0.36 percent on Thursday.
As a result, exotic CD products are increasingly being discussed as antidotes for sinking CD rates.
When considering any product such as an indexed CD, beware of fees and commissions. Too often hidden costs are swept under the rug, or buried in a "War and Peace"-length prospectus.
"I saw something yesterday that was, what is called a principal-protected CD -- you couldn't get less than what you put in and you could basically get the upside of the stock market. In the fine print, it said 'net of fees.' The problem was that the commission being paid to the broker was 10 percent," says Herbert Hopwood, CFP, president of Hopwood Financial Services in Great Falls, Va.
That means the CD needs to earn at least 10 percent before you break even.
"You had to read 20 pages into the prospectus," says Hopwood.
Donald Cummings Jr., managing partner at Blue Haven Capital, in Geneva, Ill., saw a similar product last month.
"I'm just horrified by it," he says.
"It's an index-linked CD with 8 points of commission in it. The problem is that a person walks into a bank and wants a CD and all of a sudden the teller is referring them over to the desk. You think he's a bank employee, but he's a broker," Cummings says.
The fees were buried in a 175-page prospectus.
"It's as dense as lead. It's all out there in black-and-white -- that's their defense: 'Gosh, we gave you the OS,'" says Cummings. OS stands for official statement.
The bottom line is that no matter how great the yield is, the first question always has to be: What are the fees and how are you getting paid?
This is yet another argument for a universal fiduciary standard.
Have you ever bought a CD that was not exactly what you thought it was?
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No, I hate CDs. The rates have never looked good in my lifetime ... well maybe 1982 but I was 6.
Look, if the rate is really good ... worry.
We had clients over the last 2 years get burned on brokerage CDs because they bought them from a small local bank at a premiums and guess what? The FDIC came in and repaid the client the principal but not the amount paid above par...something to think about.
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I WOULD LIKE YOUR weekly CD news letter.
Thank You.
Buck Scogin