Years of low interest rates have provided underwhelming options for investors seeking Certificates of Deposit (CDs) as a relatively safe component of their portfolio. Yields above 1% are hard to find and often require tying up your money for a lengthy period. Even with a laddering strategy, the poor yields may not be worth the restrictions on cash.
Federal Reserve interest rate hikes have begun. Many credit unions and Internet banks have recently released higher CD rates in the region of 1.5% APY for 12-month, 1.7% APY for 24-month, 2% APY for 36-month, and 2.6% for 60-month CDs.
Higher-yield CDs are available, often trumpeting those high yields in order to entice investors — but how can the lender afford to pay rates that are far above the norm? FINRA, the Financial Industry Regulatory Authority, has the same question. They recently issued an investor alert regarding higher-yield CDs based on the number of calls received by their Securities Helpline for Seniors.
High-yield CDs can be a legitimate form of a loss leader, offered by a bank or credit union in order to gain your business. Any legitimate high-yield CD with yields considerably over market rates is going to have significant limitations. There may be maintenance fees, very high minimum deposit thresholds ($25,000 is a typical target), and extended timeframes involved.
CD promotions can be found that pay 7% or above to new customers with limited ranges of investment. Credit unions and smaller banks may be particularly aggressive with rates in order to compete with larger bank chains. That is all fine, as long as the offer is legitimate. However, FINRA suggests that you be very wary of lenders that attempt to steer you away from the advertised CDs and toward more lucrative products for the lender.
To take advantage of high-yield CDs, you may have to visit a bank facility and listen to a sales pitch for alternative products such as annuities. There is nothing inherently wrong with that, as long as the advertised high-yield CD is available. Take some time to dig into the specifics and limitations of the high-yield CD, because you may find a “bonus” included in the CDs yield. In essence, an incentive payment to get you in the door is attached to a bit more conventional CD to give the appearance of a higher rate. Again, not an issue as long as the bonus is paid as advertised.
Compare the pitch for alternate products carefully, as the terms may be “adjusted” to account for the CD bonus you would have received. Ask for a detailed breakdown of the total cost and yield comparisons between the high-yield CD and the alternate product. If they cannot provide such a comparison or you do not feel comfortable that you understand the differences, seek a second opinion or do more research before agreeing to any product.
Take the time to verify that you are dealing with a FINRA-registered entity. BrokerCheck can verify the status of the company and the people providing an offer. Alternative investments like annuities can be considered an insurance product, and it is possible that your offer falls in that category instead. Check with your state insurance commission to make sure that you understand the basics of what you are buying and from whom you are buying it.
Can you find legitimately high CD yields? Sure, you can… but you must look out for financial products that are more bait and switch than they are legitimate offers. If you are unsure of the best way to proceed, ask for a second opinion — and if you run into deceptive practices, contact FINRA to let them know. Do not let questionable practices go unchallenged.
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