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Ken Tumin founded the Bank Deals Blog in 2005 and has been passionately covering the best deposit deals ever since. He is frequently referenced by The New York Times, The Wall Street Journal, and other publications as a top expert, but he is first and foremost a fellow deal seeker and member of the wonderful community of savers that frequents DepositAccounts.

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Beware of CD Alternatives Being Pushed By Banks

POSTED ON BY

One of my readers told me in an email that an investment guy at his bank was trying to sell him on bonds while he was redeeming a matured CD. In the last month I also have seen this. While I was at PNC and Chase, the bankers referred me to one of their investment advisors. It should be noted that you may also see this at credit unions. Some examples at large credit unions include Golden 1 Investment Services and BECU Investment Services. So I thought it was worth repeating the following advice from Clark Howard:

You should never buy insurance or investments in a bank, though they'd love if you do just that. When you buy investments at a bank, you pay monster commissions and they tend to push you into their own products. It's a disaster for you.

If you are looking for alternatives to CDs, it's a good idea to do your own research. Here are two good sources of basic investment information:

These provide an overview of sound investment strategies with a review of the basic asset classes like stocks and bonds. I plan to continue to focus on deposit accounts in this blog, but I'll try to touch on other products like immediate fixed annuities and Treasury Inflation Protected Securities.

I often post in the DepositAccounts.com Investments sub forum. Most of these posts include links to articles and resources on the web covering various topics of investments. If you come across useful articles and information on the web, feel free to post in this forum. You can follow the forum using this forum page which will show you the blog-like view of all of the featured forum posts.


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Comments
20 comments.


Comment #2 by Smokeboat (anonymous) posted on
Smokeboat
Nothing new under the sun....these gotcha traps have been preying on the uninformed for years.

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Comment #3 by Shorebreak posted on
Shorebreak
Oh please, Anonymous - #1, can we get off of these Communists under every bed rants for a while and offer some useful advice to the readers of Ken's excellent blog?

Bank customer service representatives steering customers with maturing CDs to a co-located "investment counselor" has been a regular occurrence for decades. It's all about commissions for the employees and the bank. Senior citizens many times fall for this trap and end up losing much of their principal when the bond funds start tanking when interest rates go up. Customers must be aware of this and firmly say "no thank you" to the bank representative.

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Comment #5 by Wil posted on
Wil
Apparently more readers find Shorebreak's advice useful than Anonymous #4's. Shorebreak, just ignore the cranks who can't take reasoned disagreement. There are plenty others who appreciate your comments.

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Comment #6 by Anonymous posted on
Anonymous
Shorebreak is correct, not only that bank employees may have an economic incentive to refer a bank client to an affiliated investment counselor, but they often do so without full and adequate disclosure of the varying risks in such products.

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Comment #7 by Anonymous posted on
Anonymous
I can't think of a bank I have called for interest rates which does not have a "financial counselor" who they want to switch me to to help me find investments with higher rates.  I quickly tell them "no thank you" and go on to the next bank on my list.  I don't know exactly when this started but many years ago we never had "financial counselors" at any bank I did business with.  It's a ploy to make more money for themselves and I don't think they worry about the "risks" in many of their offers.

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Comment #8 by Anonymous posted on
Anonymous
I'd listen to Shorebreak before Anonymous #1/#4 any day.

 

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Comment #9 by Shorebreak posted on
Shorebreak
Thanks for the vote of confidence people with your kind posts.

Re: Anonymous - #7, This "financial counselor" malarkey began when banks were allowed to go into the investment and insurance business following the repeal of the  provisions of the Glass–Steagall Act by the Gramm–Leach–Bliley Act in 1999,  effectively removing the separation that previously existed between investment  banking which issued securities and commercial banks which accepted deposits. The deregulation also removed conflict of interest prohibitions between investment bankers serving as officers of commercial banks. This repeal directly contributed to the severity of the Financial Crisis that began in 2007 by allowing Wall Street investment banking firms to use their depositors' money that was held in the commercial banks.

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Comment #10 by Anonymous posted on
Anonymous
.

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My Dear Ken - Bank Deals Guy,

 

Are you really serious that you plan to touch on the "Immediate Fixed Annuties"? 

 

My sincere hope is that this "touch" is not to pander this product.  If not, then I'd feel like uttering the last words of Julius Caesar: "Et tu, Brute?"

 

1) Fixed Annuities are not insured by NCUA nor by FDIC. 

2) Fixed Annuities are not gurenteed by the US Government unlike the i-Bonds or EE-Bonds.

3) Fixed Annuities are merely the gurentees of the Insurance Companies that issue them.  (Insurance Companies like the AIG which was bailed out by the US Tax-Payers.)  The gurentees by an insurance company becomes null and void if/when the insurance company goes bankrupt. Also the people who buy the Fixed Annuity are the policy holders of the insurance compnay - not the shareholders.  The insurance compnay most of the times is a for-profit organization and its responsibility is to maximize the profit for the shareholders, not for the policy holders.

4) Simply put when one purchases a fixed annuity what s/he is buying is merely a promise by an insurance company that they will keep paying you a certain amout for a certain durstion (which might be as long as you will live.)  Does such a promise sound too good to be true?

5) When one purchases the fixed annuity, the ownership of the money is transferred from the purchaser to the insurance company.  What this means is you are no longer the owner of the money, but the money you paid belongs to the insurance compnay.  This of course implies that such money can and will be claimed to settle anything that is bought against the insurance compnay.  ( e.g. Claims/Fines by IRS, Suiters, Creditors, Courts. etc. )  Are you positive that you want to lose the ownership of your money to an insurance company?

 

Yours Truly,

Anonymous

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Comment #12 by Anonymous posted on
Anonymous
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My Dear Ken - Bank Deals Guy,

 

I am a trader, but I stop by at your blog for getting the recommendations about the "safe" products.  Like I wrote above, if you are venturning into recommendations like "Immediate Fixed Annuity" then without a doubt I'd repeat:  "Et tu, Brute?"

 

My logic, so far as non-safe products is concerned is very much opposed to what your Mr Clark Howard is recommending. 

 

Per Mr Howard: "No matter which route you choose, my goal for you is to have an automatic deal where you put in a set amount of money each month to build the habit and reduce the risk to you. By making regular contributions monthly in equal amounts, you are doing what's called "dollar cost averaging.""

 

In my opinion the "dollar cost average" is nothing short of playing russian roulett with your money.  Some of my opinions (inluding what I wrote above about the "Immediate Fixed Annuity") are at the URL below in the "Beware" section.

http://salilgangal.com/info/tp.html

 

Yours Truly,

Anonymous

4
Comment #13 by Anonymous posted on
Anonymous
We need a new 2000 page law against this practice.:)

1
Comment #14 by emdtech posted on
emdtech
I have bought several CD’s at Banks and Credit Unions as well as Annuities from insurance companies over the years. The interest rates for fixed and CD - type annuities have gone down just like Bank CD's in recent years. It is harder to justify CD annuities as they have a market value adjustment and surrender charges if you decide to end your relationship early. You need to do your homework as with any investment in the areas of  knowing how stable the company is relative to its peers (ie. know the AM Best, Fitch and S&P ratings) as well as the terms of the product. If you invest in FIXED instruments, the principle is secure based on the ratings of the insurance companies. They are not driven by bonds as was mentioned in earlier message threads. They should not lose any principle unless the company defaults (99% do not).

What is right for you? That depends on your time horizon and need for the money within the time frame invested. You should not lose any principle if the company is solvent. Most annuities allow for a 10% withdrawal annually for distribution purposes (if needed) without penalty.

You need to fully understand the facts (disclosures) prior to inventing. If the agent cannot explain the "facts" to your understanding, you should walk out as no one should twist your arms to buy.

I thought it was necessary for everyone to understand that CD’s and annuities do play a role, potentially in your investment strategy for a diverse portfolio.

 

 

5
Comment #15 by Smokeboat (anonymous) posted on
Smokeboat
Long story short....Read or listen to "13 Bankers", you will not believe your eyes or ears.  Politically neutral, well reasearched and footnoted.  P.S.  Smokeboat is navy slang for diesel submarnines.

2
Comment #16 by Smartshopper (anonymous) posted on
Smartshopper
It is funny that you guys believe the banks have some shady investment guy waiting to prey on the unsuspecting rate shopper.  If you rely soley on bank cd rates for your income needs, you are going to lose and you are going to lose bigtime.  Sure, there is FDIC insurance, but the fact of the matter is that inflation is chewing up purchasing power every year while you are locking your money up in the one percent range.  With the number of banks that have failed in my neck of the woods, I say good luck finding that small bank from nowheresville that offers a teaser rate.  Me?  I perform my due diligence and take a step along the risk continuum to maintain my income needs and protect my purchasing power.  Good luck with your pitiful bank CDs!! 

1
Comment #17 by RIFSLAW (anonymous) posted on
RIFSLAW
I don't think it is funny at all. Nor do I think people who posted above advocate placing all of one's assets in CD's or like investments. What I think is tragic is when a banker refers an unsophisticated banking client whose CD has matured to an affiliated investment counselor and neither adequately explains the risks of "alternate" investment vehicles. Each person has to invest in equities, bonds, income producing investments and alternates if any based on his own risk tolerance after being fully informed of risks. Often someone who has a sizable portion of their net worth in a CD is likely unsophisticated and merely invests elsewhere based on promised higher yields without understanding the higher risk.

1
Comment #18 by Apache (anonymous) posted on
Apache
Rifslaw:  I disagree with you that people who have a sizable portion of their investments in CDs are "unsophisticated".  Maybe it is because they have researched other investments and/or been burned by certain other investments that they have made a mature and imo, "wise" decision to stick with CDs.  I don't see them as a group of elderly people wandering in the streets not knowing what to do with their money.  These people may have spent years saving these funds and they are not going to allow themselves to be hoodwinked by some young financial advisor trying to sell them annuities, insurance products, or even corporate bonds etc.  "Unsophisticated"???  I think not.

3
Comment #19 by RIFSLAW (anonymous) posted on
RIFSLAW
Apache: The sophisticated CD purchasers do not concern me and are not the targets as detailed above since, as you rightly point out, they have the experience or education to make the correct choices for themselves, whatever those choices may be. The point of the post is to be cautious about being offered alternate investment options that might appear to be as safe as a CD--and only the unsophisticated, elderly or otherwise, would not understand the difference between a CD and other products that an affiliated counselor might try to sell without fully adequate disclosures of the products and risks.

2
Comment #20 by Turnkey rentals (anonymous) posted on
Turnkey rentals
i want to know more information about that. how i get that? please reply as soon as possible…

 

1