Bankers’ Hours column: You don’t need help with a certificate of deposit
You may have seen the ads that promote, say, a 4 or 4 1/2 rate on a short term certificate of deposit insured by the FDIC. It’s particularly puzzling, because you just checked, and maybe 1 percent was the best you could get at your bank.
Wow! So, how can a bank do that? Well, the answer is, it can’t. Or, accurately, it won’t. The company that placed the ad is using an old but very successful marketing ploy. Offering a gift to get a potential customer to listen to a sales pitch.
One the big players in this particular arena bills itself as an investment adviser, dealing in annuities, insurance and “brokering insured deposits.” In the latter instance, their promotional material claims that they can get higher rates for a depositor through their sophisticated research, that the volume of deposits they generate compel financial institutions to pay higher rates to their clients, and that banks that take high a high volume of brokered deposits are on the high end of the safety and soundness chart.
None of these claims are true. You can find the best rate at an insured bank by going to a website like Bankrate.com, which is exactly what this advisory firm does; rates for short term CDs are very low, and vary by just a few basis points (a bp is 1/100th of 1 percent). They get no premium for assisting borrowers in opening an account, and any bank that has a large percentage of brokered accounts in its deposit base is drawing very unfavorable regulatory scrutiny.
But none of this really matters to this firm, because brokering deposits isn’t one of their business lines; it is, however, a marketing tactic.
Rather, their business is selling insurance and annuities, and to do this, a sales message must be delivered to people with money.
What better way to do this than offer rates on CDs that are too good to be true, and, by the way, set the minimum deposit at $25,000. On top of that, you require a face to face meeting to set up the CD at your office.
But what about that high rate? How do they deliver that? Simple: They give you a cash bonus to make up the difference. To make it easy for a math-challenged person like myself, here’s how it works. Say a bank is paying 1 percent annual interest on a CD with a six-month term. On $25,000 that’s $250. Since it’s a six-month instrument, the amount the depositary would credit to the account would be $125.
Our advisory company has touted, say, a 4 1/2 percent rate, which, for six months, would come to $563. So the difference between the actual money accrued in the account and the advertised rate is $438.
That amount would be paid to you, either by increasing your deposit amount, or by a check handed to you, in exchange for your listening to a sales presentation. If it lasts for two hours, you’ve made over $200 per hour. Not bad, unless you’re a lawyer, doctor or plumber. It all depends on what your time and travel expense are worth to you; and, of course, if you want to buy an insurance product.
Is it a scam? No — it’s just capitalism in action.
There are those who actually seek to make a living brokering deposits, although not as many as before the Great Recession. Some specialists work solely with government entities, negotiating rates with big banks on multimillion deposit accounts.
There’s virtually no reason why an individual investor would use a deposit broker. Bank rates are readily available and easy to compare. And deposit brokers aren’t regulated by anybody. No federal state license is required to do business.
About all you need to know about CD investing is to make sure that the bank, savings bank or credit union is insured by the federal government, and then, to be absolutely safe, keep your balance below the $250,000 insured amount. There’s never been a dime lost in an account that’s fully insured by the FDIC or the NCUA (National Credit Union Association).
Pat Dalrymple is a western Colorado native and has spent almost 50 years in mortgage lending and banking in the Roaring Fork Valley. He’ll be happy to answer your questions or hear your comments. His e-mail is email@example.com.
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