Make us your home page
Instagram

High-yield brokered CDs often have hidden risks

William Katker thought he was playing it safe and smart when he parked some retirement money last year in a high-yield certificate of deposit purchased through his brokerage.

Katker's government-insured six-month CD had an annual percentage yield of nearly 4 percent, easily beating the returns of the money-market funds to which many investors fled last year during the stock market's plummet.

It seemed like a low-risk move — until the bank that issued the CD failed. Then Katker had to get in line with other former customers of California-based IndyMac Bank to recover his cash. It took him nearly a month.

"I didn't lose my principal, but I lost access to the money and almost a month's worth of interest," said the retired stockbroker from Orlando. "It upset me because my brokerage knew IndyMac was having problems but didn't tell us."

Even relatively safe, federally insured certificates of deposit issued by banks and credit unions can pose hazards for investors seeking to squeeze the biggest returns from their portfolios amid a slumping stock market and historically low interest rates.

In some cases, investors are turning to their brokerages, which offer them higher CD rates based on special deals negotiated with certain banks. In other cases, nonbrokerage firms are luring investors with high rates they claim to have tracked down at relatively unknown banks.

Experts say that, even with something as straightforward as a savings CD, you should be wary of any claim that sounds too good to be true.

"There is a real need for consumers to be on their toes and do their homework," said Greg McBride, senior financial analyst for Bankrate.com in North Palm Beach.

• Start with the basics, such as the current limits on Federal Deposit Insurance Corp. coverage. Generally, each account holder at a single bank or credit union is covered for as much as $250,000, though people can increase coverage by having both joint and individual accounts.

• Next, you should know something about the bank or credit union whose CD you're planning to buy. The FDIC (toll-free 1-877-275-3342 or fdic.gov) can tell you if the bank is still in good standing. For credit unions, call toll-free 1-800-755-1030 or go to ncua.gov. Any sign of financial difficulty at an institution should give you pause, even if it is FDIC-insured. If the bank fails — as 71 U.S. banks have since early 2008 — you may have an aggravating and income-losing wait before regaining your money.

Buying a CD through a broker, as Katker did, can complicate things further.

Although "brokered CDs" typically offer some of the best rates available, there are limits, in some cases, to the FDIC insurance, which could result in loss of principal.

"If you need to get your money out prior to the CD maturity date, it's not as easy as forfeiting some interest as an early-withdrawal penalty and going on your way," McBride said. "In fact, the CD will be sold to an investor, and the amount you receive back depends on what the investor will pay on the secondary market."

Buying through a brokerage also may cost you account fees, said Jason Chepenik, managing partner of Chepenik Financial in Orlando. "Some brokerage accounts have closing fees of up to $100, so that would eat into any extra income you'd get" from the higher rate, he said.

Potentially worse are high-yield CDs promoted by unfamiliar companies that may, in fact, be peddling much riskier investments.

Some companies — often known as CD-locator services — operate legitimately by referring investors to banks offering a high-yield CD, regulators say. If the advertised rate isn't available, the firms must cut investors a check to make up the difference in yield.

But people who respond to such promotions should be ready for a sales pitch for other financial products; that's how such operations really make their money, said Mark Mathosian, an investigations manager for the Florida Office of Financial Regulation.

"These companies are looking for sales leads," he said, "and if many of the people who come in asking about the CD end up buying an annuity, the company will make some big commissions." Investors should call the Office of Financial Regulation consumer phone line (toll-free 1-800-848-3792) to find out if a particular company is properly registered with the state and whether anyone has filed complaints against it.

"Some of our competitors have taken unfortunate shortcuts with customers," said Matlock L. Schilleman, head of Clearwater-based First Financial Group LLC.

But too many people end up roped into high-fee annuities and other costly or high-risk investments when all they wanted was a safe but high-paying certificate of deposit, said Paul Auslander, a financial planner and chairman of American Financial Advisors Inc. in Orlando.

High-yield brokered CDs often have hidden risks 07/04/09 [Last modified: Saturday, July 4, 2009 4:31am]
Photo reprints | Article reprints

Copyright: For copyright information, please check with the distributor of this item, Orlando Sentinel.
    

Join the discussion: Click to view comments, add yours

Loading...
  1. Rick Scott appoints 'my friend,' Jimmy Patronis, as Florida CFO

    State Roundup

    TALLAHASSEE — Gov. Rick Scott on Monday picked close friend and supporter Jimmy Patronis to be Florida's next chief financial officer, a lucrative prize for loyalty that casts new light on Patronis' pro-business votes as a legislator and his support for higher electricity costs as a regulator.

    Rick Scott appoints Jimmy Patronis (background) as CFO. [STEVE BOUSQUET | Tampa Bay Times]
  2. Local gas prices plummet as Fourth of July holiday travel approaches

    Tourism

    TAMPA — Local gas prices are enjoying an unseasonal dip around the $2 mark just in time for the hectic Fourth of July holiday travel weekend.

    The price of regular unleaded gasoline has dropped to $1.99 at a Rally station on Pasadena Ave. South and Gulfport Boulevard South, South Pasadena.
[SCOTT KEELER   |   Times]

  3. Air bag recalls, lawsuits lead Takata to file for bankruptcy

    Autos

    Shattered by recall costs and lawsuits, Japanese air bag maker Takata Corp. filed Monday for bankruptcy protection in Tokyo and the U.S., saying it was the only way it could keep on supplying replacements for faulty air bag inflators linked to the deaths of at least 16 people.

    Japanese air bag maker Takata Corp. CEO Shigehisa Takada bows during a press conference in Tokyo on Monday. Takata has filed for bankruptcy protection in Tokyo and the U.S., overwhelmed by lawsuits and recall costs related to its production of defective air bag inflators.
[(AP Photo/Shizuo Kambayashi]
  4. Airbag maker Takata bankruptcy filing expected in Japan, U.S.

    Corporate

    DETROIT — Japanese airbag maker Takata Corp. has filed for bankruptcy protection in Tokyo and the U.S., overwhelmed by lawsuits and recall costs related to its production of faulty air bag inflators.

  5. Federal agencies demand records from SeaWorld theme park

    Tourism

    ORLANDO — Two federal agencies are reportedly demanding financial records from SeaWorld.

    Killer whales Ikaika and Corky participate in behaviors commonly done in the wild during SeaWorld's Killer Whale educational presentation in this photo from Jan. 9. SeaWorld has been subpoenaed by two federal agencies for comments that executives and the company made in August 2014 about the impact from the "Blackfish" documentary. 
[Nelvin C. Cepeda/San Diego Union-Tribune/TNS]