If you've ever wondered about those CDs advertised in newspapers with very high rates, this press release should interest you. These ads typically list CD rates several percentage points above market rates. Some examples of these ads are available online at The Oklahoman and at the Tyler Morning Telegraph. One of these ads lists a 5.25% APY 3-month FDIC-insured CD. The small print often has a subtle mention of a maximum deposit: "Deposit amounts exceeding minimum may be subject to yield other than advertised." Another part of the small print gives a hint of how they can pay the high rate: "promotional incentive may be included to obtain yield."
The ads describe these CDs as FDIC-insured so it can appear that the ad is from a bank. Sometimes they do state in the small print that their company is a "financial services firm that locates FDIC insured banks." Most of these companies are careful to avoid misrepresentations that cross the line. It appears the company cited by the FDIC crossed the line by using the FDIC logo.
The FDIC provides some interesting background on how this company operates. Here's an excerpt from the press release:
Amerilife's CD ads promised an interest rate on the CDs higher than the rates offered by any bank, and prominently displayed the FDIC logo and seal, giving the impression that Amerilife was an insured bank. When a consumer went into an Amerilife office to purchase the advertised CD, Amerilife helped the consumer sign up for the CD on a bank's website. Amerilife then forwarded a bonus payment plus the consumer's check to the bank as the CD principal. The total amount created the rate of return advertised by Amerilife. The advertisements, however, misrepresented the actual terms and conditions under which the bank offered the insured CDs.
Note that they provided a bonus payment, and this created the rate of return advertised. Here's an example of how a bonus can raise the effective interest rate:
Example of an Advertised CD:
- Maximum deposit: $10,000
- 3-month CD
- Advertised rate: 5.00%
- Real interest rate from the bank: 1.50%
- Bonus payment: $87.50
- Actual interest earned from bank: 0.015*10,000/4 = $37.50
- Bonus plus bank interest: $87.50+$37.50 = $125
- New rate of return after bonus: ($125*4/$10,000)*100 = 5.00%
For this case, the company did more than just meet with the customers. Here's what the FDIC describes:
As part of its marketing campaign, Amerilife advertised above market-rate certificates of deposit (CDs) in 80 newspapers nationwide. Amerilife generated customer lists with information from those who responded to the ads in order to later contact the consumers and attempt to sell them uninsured annuities.
As this Bankrate article describes, most financial planners are against annuities. Also, consumer advocates like Clark Howard often warn people against them.
Most of these companies are not scams, but if you're considering taking advantage of these "bonuses", make sure you don't get pressured into buying an annuity or some other product that you didn't intend to buy.