Very High CD Rates Advertised in Newspapers - Are They Real?
Have you noticed ads in the newspapers which advertise very high short-term CD rates supposedly from FDIC-insured banks? These are quite common. Last year the FDIC mentioned these offers in its consumer news. Here's an excerpt:
Beware of an Advertised CD Rate Far Above the Competition – First, it could be a product issued by a company that is not federally insured and second, it could be a marketing ploy. In either case any money invested could be at risk. A company may advertise in the local newspaper a 5.0 percent interest rate for a six-month bank CD for consumers to invest. When a customer calls, he or she is told to come to the office to discuss the details. It turns out that the bank is paying only 5 percent on the first $1,000 - not 5.0 percent on any balance. Another situation to beware of occurs when the customer is informed that the bank will pay only 2.5 percent but the sales person for the company offers to add enough money to the CD purchase to make up the interest rate difference. When the CD matures, there is no similar offer on a new CD and the individual can be steered into purchasing a non-insured investment that may be a poor choice for the consumer but very lucrative for the sellers.
If the company does place the deposits with an FDIC-insured bank and it does add in a bonus to make up for the interest rate difference, it could be a good deal if you don't mind listening to their sales pitch. It would be similar to receiving a bonus after listening to a timeshare sales pitch. But remember they wouldn't be making these offers if they weren't able to convince a significant number of people to buy their non-bank products.
With this in mind, here are some examples of these CD ads that I've seen in today's papers.
From the 8/22/10 edition of the Austin American Statesman:
- 4.50% APY 6-month CD via Sun Cities Financial Group (512) 502-1715. Important small print: Yield may include a bonus. $25,000 deposit required. Sun Cities is not a bank.
- 5.60% APY 3-month CD & 4.30% 6-month CD via First Fidelity Tax and Insurance (512) 402-8514. Important small print: Yield may include bonus. We are not a bank. Minimums and maximums apply.
From the 8/22/10 edition of The Oklahoman newspaper:
- 5.01% APY 3-month CD via Firstar Financial Group of Central Oklahoma, LLC. Important small print: Firstar is a financial services firm that locates banks offering the highest CD yields nationwide; rate and deposit subject to availability; rate will be provided by the local Firstar office as a Promotional Incentive.
The important question to ask is what's the maximum deposit that will qualify for the advertised yield. If the maximum deposit is small and it's only a 3-month term, the bonus they will add will likely be small. For example, the total amount of money earned from a 5.60% APY 3-month CD with a $10K deposit is only $140. If the bank they are using is paying 1.00% for the 3-month CD (which is competitive these days), the money earned on a $10K deposit is $25. So the money you would receive would come from the following:
- $115 bonus provided by the financial company
- $25 interest from the bank's 1.00% 3-month CD
If the maximum deposit for the 4.50% APY 6-month CD is $25,000, that could add up to a nice bonus:
- $406 bonus provided by the financial company
- $156 interest from the bank's 1.25% 6-month CD
Note, these bonus amounts and CD yields are just guesses about what may be offered. They're just intended to show how the companies are able to offer the high yields they are advertising. Do you have experience with these types of companies? Are there similar offers in your local paper? Please leave a comment and share your experience.
Also in the very very small print at the bottom of the screen it said this is not meant to be legal advice. Pretty funny. It was worth sitting there for 1 hour for the wonderful prime rib dinner, salad, rolls, fresh vegtables, and chocolate mousse at a beautiful lake front resort and visiting with others at the round table. Met some very interesting people.
I suppose you can view the "teaser" rate they offer on their 6-month CD as about what you would get by going (with your spouse) to one of the "free dinners" they use to tout their annuities.
So, would you rather have the cash or a prime-rib dinner for two?
I'd rather just show up at the appointed restaurant and get the dinner.
PS: In the trade, folks like us are called "plate-lickers", people who just show up for the free dinner and have no intention of buying the annuities. Indeed, we usually are somewhat disruptive, arriving after having a couple of drinks and snickering at the presentation, to the amusement of all at our table. Generally, we are shown the door (86'd as it were) before dessert.
Advertised yield consists of 1.10% yield plus 2.90%bonus which equals advertised yield. New custmers only.
Wouldn't touch it.
Do not deal with these people.
Additonally, I would be surprised that any bank would allow a third party to complete "their" paperwork for them. The bank has numerous responsibilities for identifying the owner of the account as it relates to the Patriots Act.
Two old adages seem to apply here:
1. You get in bed with dogs... you get fleas.
2. If it's to good to be true, it is.
Be cautious, the reluctance to discuss over the phone should be a huge clue to be aware.
1.) A reputable bank or brokerage firm routinely posts their CD rates, minimum deposit amount openly on their website, also they disseminate the info to bankrate.com and at the very least they will tell you their rates when you call to inquire. The fact that they won't reveal the specifics of their CD offering unless you physically show up and meet with them is a huge red flag that there's something fishy going on.
2.) Everyone is wondering how they make money if they are paying you a bonus above and beyond what the actual FDIC-insured bank is paying on the CD. Essentially, they are compiling a "suckers list" of people who are not very sophisticated with financial matters but who have some cash to plunk down on the table. When you come in for your appointment, the nice lady will be sure to ask lots of questions about what other funds you have besides the $25K.
3.) As shown in the example in the article, they are offering you 4.5% on a $25K 6 month CD but the interest rate is actually only 1.25% annualized ($156) and the remaining 3.25% ($406) is paid as a bonus from Sun Cities Financial. The way they make their money is that once the 6 months is up, they have you as a captive audience to sell you an annuity or some other product with super high hidden fees. They pitch it to you showing you another "amazing" rate of return (which, as we all know, is really your own principal being paid back to you but it's so convoluted most people don't really understand it). They will have already earned your trust with the results of the 6 month CD so you will be all buttered up for the long con. They'll start calling you well in advance of the maturity date and will have you back in the office to get it all wrapped up before that day comes.
4.) If you walk out the door at the end of your 6 month CD with your extra $406 in your pocket and you have the fortitude to resist the charms of their sales people when they try to sell you the annuity, then great, you made a little extra cash. Go buy yourself a nice steak dinner. No one's going to get rich on $406. Your principal is most likely secure since it is held at the bank (not at Sun Cities Financial). Whether you actually get the $406 bonus probably depends on whether they are still in business in 6 months. On the other hand, if you get suckered into an annuity with this company, then you will be giving them back the $406 and many thousands more, to be sure. They are not in business to hand out free bonuses. Be prepared for the inevitable hard sale.
Financial. I was considering investing with them before I went to the FINRA website and read