Investing In Certificates of Deposit II
Part II
BEFORE YOU BUY
Before you consider purchasing a CD from your bank or brokerage firm, make sure you fully understand all of its terms. Carefully read the disclosure statements, including any fine print. And don't be dazzled by high yields. Ask questions – and demand answers – before you invest. These tips can help you assess what features make sense for you:
• Find Out When the CD Matures – As simple as this sounds, many investors fail to confirm the maturity dates for their CDs and are later shocked to learn that they've tied up their money for five, ten, or even twenty years. Before you purchase a CD, ask to see the maturity date in writing.
• Investigate Any Call Features – Callable CDs give the issuing bank the right to terminate-or "call"-the CD after a set period of time. But they do not give you that same right. If interest rates fall, the issuing bank might call the CD. In that case, you should receive the full amount of your original deposit plus any unpaid accrued interest. But you'll have to shop for a new one with a lower rate of return. Unlike the bank, you can never "call" the CD and get your principal back. So if interest rates rise, you'll be stuck in a long-term CD paying below-market rates. In that case, if you want to cash out, you will lose some of your principal. That's because your broker will have to sell your CD at a discount to attract a buyer. Few buyers would be willing to pay full price for a CD with a below-market interest rate.
• Understand the Difference Between Call Features and Maturity – Don't assume that a "federally insured one-year non-callable" CD matures in one year. It doesn't. These words mean the bank cannot redeem the CD during the first year, but they have nothing to do with the CD's maturity date. A "one-year non-callable" CD may still have a maturity date 15 or 20 years in the future. If you have any doubt, ask the sales representative at your bank or brokerage firm to explain the CD's call features and to confirm when it matures.
• For Brokered CDs, Identify the Issuer – Because federal deposit insurance is limited to a total aggregate amount of $100,000 for each depositor in each bank or thrift institution, it is very important that you know which bank or thrift issued your CD. Your broker may plan to put your money in a bank or thrift where you already have other CDs or deposits. You risk not being fully insured if the brokered CD would push your total deposits at the institution over the $100,000 insurance limit. (If you think that might happen, contact the institution to explore potential options for remaining fully insured, or call the FDIC.) For more information about federal deposit insurance, visit the Federal Deposit Insurance Corporation's web site and read its publication Your Insured Deposit or call the FDIC's Consumer Information Center at 1-877-275-3342. The phone numbers for the hearing impaired are 1-800-925-4618 or (202) 942-3147
• Find Out How the CD Is Held – Unlike traditional bank CDs, brokered CDs are sometimes held by a group of unrelated investors. Instead of owning the entire CD, each investor owns a piece. Confirm with your broker how your CD is held, and be sure to ask for a copy of the exact title of the CD. If several investors own the CD, the deposit broker will probably not list each person's name in the title. But you should make sure that the account records reflect that the broker is merely acting as an agent for you and the other owners (for example, "XYZ Brokerage as Custodian for Customers"). This will ensure that your portion of the CD qualifies for up to $100,000 of FDIC coverage.
• Research Any Penalties for Early Withdrawal – Deposit brokers often tout the fact that their CDs have no penalty for early withdrawal. While technically true, these claims can be misleading. Be sure to find out how much you'll have to pay if you cash in your CD before maturity and whether you risk losing any portion of your principal. If you are the sole owner of a brokered CD, you may be able to pay an early withdrawal penalty to the bank that issued the CD to get your money back. But if you share the CD with other customers, your broker will have to find a buyer for your portion. If interest rates have fallen since you purchased your CD and the bank hasn't called it, your broker may be able to sell your portion for a profit. But if interest rates have risen, there may be less demand for your lower-yielding CD. That means you would have to sell the CD at a discount and lose some of your original deposit –despite no "penalty" for early withdrawal.
• Thoroughly Check Out the Broker – Deposit brokers do not have to go through any licensing or certification procedures, and no state or federal agency licenses, examines, or approves them. Since anyone can claim to be a deposit broker, you should always check whether your broker or the company he or she works for has a history of complaints or fraud. You can do this by calling your state securities regulator or by checking with the National Association of Securities Dealers' "Central Registration Depository" at 1-800-289-9999.
• Confirm the Interest Rate You'll Receive and How You'll Be Paid – You should receive a disclosure document that tells you the interest rate on your CD and whether the rate is fixed or variable. Be sure to ask how often the bank pays interest – for example, monthly or semi-annually. And confirm how you'll be paid – for example, by check or by an electronic transfer of funds.
• Ask Whether the Interest Rate Ever Changes – If you're considering investing in a variable-rate CD, make sure you understand when and how the rate can change. Some variable-rate CDs feature a "multi-step" or "bonus rate" structure in which interest rates increase or decrease over time according to a pre-set schedule. Other variable-rate CDs pay interest rates that track the performance of a specified market index, such as the S&P 500 or the Dow Jones Industrial Average.
The bottom-line question you should always ask yourself BEFORE YOU BUY is: Does this investment make sense for me? A high-yield, long-term CD with a maturity date of 15 to 20 years may make sense for many younger investors who want to diversify their financial holdings. But it might not make sense for elderly investors.
WHAT IF YOU MADE A MISTAKE OR HAVE A COMPLAINT?
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Don't be embarrassed if you invested in a long-term, brokered CD in the mistaken belief that it was a shorter-term instrument-you are not alone. Instead, you should complain promptly to the broker who sold you the CD. By complaining early you may improve your chances of getting your money back. Here are the steps you should take:
1. Talk to the broker who sold you the CD, and explain the problem fully, especially if you misunderstood any of the CD's terms. Tell your broker how you want the problem resolved.
2. If your broker can't resolve your problem, then talk to his or her branch manager.
3. If that doesn't work, then write a letter to the compliance department at the firm's main office. The branch manager should be able to provide with contact information for that department. Explain your problem clearly, and tell the firm how you want it resolved. Ask the compliance office to respond to you in writing within 30 days.
4. If you're still not satisfied, then send your complaint to the Securities and Exchange Commission using their online complaint form. Be sure to attach copies of any letters you've sent already to the firm. If you don't have access to the Internet, please write to the Securities and Exchange Commission at this address:
Office of Investor Education and Assistance
U.S. Securities and Exchange Commission
100 F Street, N.E.
Washington, DC 20549-0213
They will forward your complaint to the firm's compliance department and ask that they look into the problem and respond to you in writing.
Please note that sometimes a complaint can be successfully resolved. But in many cases, the firm denies wrongdoing, and it comes down to one person's word against another's. In that case, your complaint will likely remain unresolved. The Securities and Exchange Commission representatives do not act as a judge or an arbitrator to establish wrongdoing and force the firm to satisfy your claim. They also will not act as your lawyer.
You should also contact the banking regulator that oversees the bank that issued the CD:
• The Board of Governors of the Federal Reserve System oversees state-chartered banks and trust companies that belong to the Federal Reserve System.
• The Federal Deposit Insurance Corporation regulates state-chartered banks that do not belong to the Federal Reserve System.
• The Office of the Controller of the Currency regulates banks that have the word "National" in or the letters "N.A." after their names.
• The National Credit Union Administration regulates federally charted credit unions.
• The Office of Thrift Supervision oversees federal savings and loans and federal savings banks.
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Bob Louder is the Founder and President of Christian Financial Ministries (www.good-steward.org). Bob is also the author of the new best selling book, "Debt Free Living God's Way," available only on the Internet (www.debtfreelivinggodsway.org). Since 1987 Bob has helped people in hundreds of churches all across the country and in the European military community learn, understand, apply and pass on "Debt Free Living God's Way" principles and practical applications. He has represented some of the top Christian financial authors and ministries to include Larry Burkett, Dave Ramsey, Christian Financial Concepts, and Crown Ministries.
Copyright 2006 Christian Financial Ministries, Inc., All Rights Reserved. You may reprint this "Special Report" in whole or in part without permission from Christian Financial Ministries, Inc. Please credit material used to Christian Financial Ministries, Inc.
