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On money

Big CD yields just a big gimmick

By HELEN HUNTLEY, Times Staff Writer

© St. Petersburg Times, published March 2, 2003


At least once a week I hear this question from a curious investor:

How can obscure financial services companies advertise bank CD yields higher than any bank around here pays? In fact, the yields are sometimes higher than any bank in the country offers.

The answer: It's a marketing gimmick. The inflated CD yields are designed to attract attention and make investors willing to endure a sales presentation for an annuity or some other insurance product.

While this practice is questionable, it has not been found to be illegal. Those who cannot be convinced to buy an annuity can get a CD, although the amount they are allowed to invest is limited.

The company kicks in some of its own funds to boost the yield to whatever was advertised. For example, if a $1,000 CD paid $20 interest in a year, the company might kick in $15 to boost the yield from 2 to 3.5 percent. The company can chalk it up to the cost of doing business, but if everyone insisted on a CD, this advertising would come to an abrupt end.

An annuity is a legitimate investment alternative, but some are better than others. If this is such a great product, why is it necessary to resort to deception to trick people into listening to a sales pitch?

Q. I recently read an article about investors bringing arbitration claims against brokerage firms. I have experienced a huge loss to my IRA and would like to investigate this further. How can I start this process?

A. Your first step should be to discuss your case with a lawyer who is experienced in handling securities arbitration cases. Not every investor loss can be pinned on the brokerage firm; the lawyer should be able to tell you whether you have a good case.

If the lawyer recommends going to arbitration, ask a lot of questions about how the case would be handled. Sometimes lawyers group claims that raise the same issues against the same brokerage firm. That can be good or bad depending on how it's handled. Ask about costs for pursuing the case and how much your lawyer would take of any award won for you.

The Public Investors Arbitration Bar Association (www.piaba.org) offers information about arbitration and the names of member lawyers on its Web site (click on "find an attorney.") You can call toll-free at 1-888-621-7484.

Q. I have a $30,000 annuity with Conseco, and I am so afraid that I have lost my nest egg as a result of the company's bankruptcy filing. I am 83 years old and that was my security. What should I do?

A. Sit tight. Conseco Inc. is in bankruptcy reorganization. However, the company says this process should have little effect on the operations of its insurance subsidiaries. Florida insurance regulators say they are keeping an eye on the situation.

If an insurance company is declared to be insolvent (which has not happened here), Florida residents are protected by the Florida Life and Health Insurance Guaranty Association. Annuities are covered up to $100,000.

Q. I have been getting calls from a commodities broker about the opportunity to cash in on higher oil prices with the possibility of war with Iraq. What do you think about this as an investment?

A. Commodities contracts are for sophisticated investors who can afford to lose their money and for business people and farmers who need to hedge against fluctuating prices for oil, sugar, foreign currency or something else. For the rest of us, they are not a good idea. Commodities are so risky that many brokerage firms will not even allow their brokers to handle transactions for customers. With commodities, you can actually lose more than your original investment, a pretty frightening prospect to most people.

The Commodity Futures Trading Commission has warned investors against sales pitches promising profits from conflict with Iraq. The problem is that everyone in the commodities market is well aware that conflict could affect oil supplies. Those expectations are already built into commodity market prices. Do you really think that you or your broker have better information and can predict the future better than other players in this market?

Beware of any investment promoter promising quick profits or using high-pressure techniques. To report suspicious activity, call the commodities commission toll-free at 1-866-366-2382.

-- Helen Huntley writes about investing and markets for the Times. If you have a question about investments or personal finance, send it to On Money. We'll try to answer those we think are of greatest reader interest. All questions must be submitted in writing, but readers' names will not be published. Send questions to Helen Huntley, Times, P.O. Box 1121, St. Petersburg, FL 33731.

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