Market Overview

Popular New CDs Often Offer Less Return For Higher Fees

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Popular New CDs Often Offer Less Return For Higher Fees
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Since the 1960s, certificates of deposit have been a favorite investment vehicle among the general public. A certificate of deposit, or CD, is a savings certificate that offers a fixed maturity date at a fixed interest rate.

According to the Wall Street Journal, Wall Street banks have now re-engineered the most "bread-and-butter of investments" in a way that results in the investor gaining an inferior return and even losing money, especially regarding market-linked or structured CDs that are tied to the performance of stocks or other assets instead of a flat interest rate.

In fact, data obtained by the Journal on hundreds of market-linked CDs created by Barclays show that many underperformed conventional CDs because there was a clause that limits upside gains.

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Among the 325 CDs issued by Barclays reviewed, 239 of them announced at least one annual return payment. Of those, more than half offered a return that was lower than what an investor could have received compared to a typical five-year conventional CD.

Among the 118 structured CDs issued at least three years ago, only 25 percent posted a superior return compared to an average five-year conventional CD. Around 25 percent produced no returns at all.

What's Going On?

Part of the reason for the lower-than-expected return is the upfront fees involved. In addition, all members of the sales chain from the wholesale broker, financial adviser and even a bank teller get paid for each product they sell.

The Journal found that the adviser who actually sells the product can get a commission of up to 3 percent of the value.

"Banks have to be delighted with these structured products," Steve Swidler, a finance professor at Auburn University told the Journal. "There's virtually no risk to them, and [the banks] sit back and rake in fees."

A Barclays spokesman told the Journal the structured CDs market has "seen significant evolution over the last few years to meet the needs of clients, investors and distributors seeking to navigate the continued challenges of a low interest rate environment."

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Posted-In: CD Certificates Of Deposit Market Linked CD The Wall Street JournalMarkets Media Personal Finance Best of Benzinga

 

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