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Question - Our bank advisor recommended a four-year contingent annual interest CD with 10 commodities. Is this a good place for our money?
March 2012
Question: My husband and I are 62 and 65, both retired. We both get Social Security, and I have a teacher’s pension. We have $200,000 in a 401(k) and about $80,000 in Roths, mutual funds and stocks. We have a combined monthly income of about $6,000 and spend about $4,000 a month; we keep the $2,000 difference in the bank. Three years ago I inherited $200,000 from my father. It was in a CD that matured and is now in our bank savings account. I’m hesitant to put it in another CD because of the low rates. Our bank advisor recommended a four-year contingent annual interest CD with 10 commodities. It has a component cap of 12%, a floor of 20% and a fee of 2.5%. I’d be locked in for four years, but it’s FDIC insured. Is this a good place for the money?
Ric: No. Actually, I would liken it to going from drinking a glass of wine to shooting heroin.
Some banks fret that their depositors are cashing out their money markets and CDs because rates are so low. The banks are losing lots of business, so many of them are trying to combat this by luring those customers into other — often complex and exotic — products that boost bank profits.
In this case they’re promising you a “floor” to minimize potential losses but at a cost of 2.5% a year. You can’t earn more than 12%, and the commodities market would have to grow far more than that for you to receive anywhere near 12%. Essentially, the chances of your making a substantial return on this product are very low.
It seems to me that you are a solution looking for a problem. It happens to people who get what we call “sudden money” — in your case a $200,000 inheritance. It’s more than they ever received in a lump sum and often it has emotions tied to it. They feel a little guilty about being rich because of the death of a loved one, so instead of dealing with it they just leave the money in the bank.
That’s where people can become prey to institutions. Bankers, brokers and insurance agents see all that cash sitting in some low-yield account, and they try to convince the customer to move the money into other products their employer has manufactured. They typically tell you that, instead of earning a measly 0.1%, there’s a potential for a substantial return, all the while knowing that the prospectus is so thick with legalese you’ll never figure out how it really works until it’s too late — but please sign here.
The product you were offered is illiquid for four years. You’d be giving the institution $200,000 that you can’t access at all or without substantial penalty. What if you have a major medical expense or other financial crisis in a year? That money would not be available to you.
My recommendation: Don’t talk to a product-pushing, commission-seeking, self-serving salesman who works at some big financial institution.
Instead talk with an independent, objective, fee-based financial advisor who is registered with the SEC or state securities regulators and who therefore — by law — has a fiduciary duty to serve your best interests. Tell that advisor your complete situation — your income, expenses, health, objectives and attitude about risk. This will enable the advisor to craft recommendations that can serve your needs.
If you don’t have an advisor, visit us at RicEdelman.com.
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