14 Oct

Structured CDs: The Latest Wall Street Scam to Take Your Money

Grant Blindbury

Grant Blindbury

Grant Blindbury has been working in the Investment Advisory industry since 2003 managing assets of affluent individuals and pension plans. Grant earned his bachelor's degree in Business & Economics at the University of California at Los Angeles (UCLA) in 2001. Grant specializes in working with clients approaching or entering retirement and positions them for success by coordinating their most important financial affairs. Grant's goal, as his client’s personal CFO, is to deliver both the financial outcome and experience necessary to accomplish their most important goals. In 2007, Grant earned the professional credential CERTIFIED FINANCIAL PLANNER™ (CFP®). He is president of his local Estate Planning Council and participates in multiple professional learning groups. He is on the Board of Directors for Big Brothers Big Sisters of Ventura County as well as being a “Big” himself. From the outset he was drawn to the client-centric model that fee-based advisory services provided and joined forces with Fields Financial Associates, Inc. He would later partner with the founders of Fields Financial Associates to form FMB Wealth Management. He has been a licensed Investment Advisor since 2003.
Grant Blindbury

Most people, especially retirees who are accustomed to banking for many years, are well aware of what a certificate of deposit, or CD, is and how it works. While they don’t typically yield high returns, these investment vehicles are some of the safest investments an investor can make. The principal is guaranteed to be returned at the end of the term, and you get paid interest while you wait.

Since the financial crisis, however, CDs and savings accounts aren’t producing the returns that they used to, which has caused them to become less desirable savings vehicles. The current prolonged low interest environment is causing many savers to seek better returns elsewhere, which only compounds the problem because of the higher risk associated with higher returns. Unfortunately, Wall Street has picked up on this trend and has started marketing a new type of CD called a structured CD. This specialized CD provides better returns on the surface, but what is hidden in the fine print might shock you.

Wall Street has decided to take something that is already branded as being safe and sell it with extra bells and whistles that rack up big fees for them (sometimes as high as 3%) while increasing the risk for the investors. A recent Wall Street Journal article noted how one investor, a 79-year-old widow, was horrified to see her $100,000 investment immediately drop to $95,712 after incurring upfront fees. The fees had been disclosed in the 266-page agreement that she signed when investing in the product, but – as many investors would do — she didn’t read all 266 pages of the document. Unfortunately, she blindly trusted the bank that sold her this lump of coal.

The real travesty here is the fact that studies have shown that almost all of these products perform worse than standard CDs. In fact, a study of 118 structured CDs that were issued at least three years ago found that  only one-quarter posted returns better than those of an average five-year conventional CD.  To make matters worse, as of June 2016, roughly one-quarter of them produced no returns at all. At least your standard bank CD doesn’t charge you a fee to open it and most perform better than their fancy structured CD cousins.

So with new products like this popping up every day, how can you protect yourself? Well, here are just a few tips that will help you to not get yourself into an investment trap.

  • Make sure you’re clear on the costs, fees and performance promises tied to any investment product.
  • Always question products that promise high returns accompanied with low risks. These are classic indicators of Wall Street Scams or Ponzi Schemes.
  • Focus on investing according to an investment plan that has been prepared alongside your trusted financial advisor. Having a plan and tracking progress makes you less apt to chase returns in riskier assets.

The world is saturated with these kinds of financial products. Using some standard common sense, sticking to a well-designed investment plan and working with a financial advisor on a regular basis can help you to avoid scams like the one mentioned here. Navigating the financial landscape can be difficult. As a rule of thumb, if something sounds too good to be true, it might just be.

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