One of my clients recently sent me a newspaper ad for CDs with surprisingly attractive rates. This CD promoted by Sun Cities Financial Group touted a 4.85% rate on an FDIC-insured CD with a 6-month term.
According to Bank rate, the current national average for a 6-month certificate of deposit is 0.27% APY, with their top yield being 2.00% APY. So how can a tiny local non-bank that you’ve never heard of beat the rates of even online banks by over 2.5%?
The firms running the ads are quick to state they are not banks. Instead, they “help consumers locate insured banks nationwide” or are “a leader in locating superior banking and insurance products.” Technically, they are “CD brokers.” The Sun Cities website explains the company is “engaged in the business of placing deposits or facilitating the placement of the deposits of third parties with FDIC-insured depository institutions.” The FDIC and SEC have some words of warning about this type of activity, which we’ll get to shortly. It turns out that the advertised rate isn’t the CD rate. I did some research and found a few other ads. One ad hinted at this by stating, “Yield may include a bonus.” The other was more explicit, stating: “Yield includes an interest bonus of 3.00%, plus 1.25% annual percentage yield.” These non-bank salespeople are supplementing bank CDs from other FDIC-insured banks with their own money to reach the advertised rate. Questionable? Yes. Scam? Well, maybe not.
Here’s how it works…
- You have to go to the company’s office (taking a page from the time-share marketing playbook).
- While you’re in the office availing yourself of the company’s “superior bank product location service,” you’ll be pitched on life insurance or an annuity. From their perspective, you’re a perfect candidate for such high-commission products. You’re in the market for a conservative, guaranteed rate of return and you’ve proven by buying the CD that you have money to invest. The fact that it’s a short-term CD means it won’t be long before you have that money available for the product they’d prefer to sell you.
- There you will be told about two or three banks they have “located” offering CDs at attractive rates (more in line with what you’ll find through com) Once you open a CD at one of the banks, the company promoting the high rate will pay you the difference in the form of a bonus, in some cases sending the bonus money along with your check to the bank where the CD will be held. For example, say they locate a bank offering a 6-month CD paying 1.25% APY. If you deposit $10,000, in six months, you will have earned $62.50 ($10,000 x 1.25% = $125, which is then divided in half based on the 6-month term). The CD broker covers the remaining 3.6%, or $180.
- You write the check for the CD directly to an FDIC-insured bank, with which the sales office is not officially affiliated with. This CD has a realistic rate, say 1.5% APY or similar.
- After a week or two, enough to make sure your funds cleared, the insurance people will cut you a check which together with the bank’s interest, add up to the advertised APY (assuming they are still in business).
Of course, the company hasn’t made any money from you yet. In fact, they’ve spent $150. When we asked one such company about this, the CD was described as a “loss leader.” They compared it to a grocery store that promotes $2 steaks with the hope that you’ll buy other things while you’re there. And what might those “other things” be in a case such as this? Insurance products.
According to the FDIC, a deposit broker “can be anyone from one person working alone from home to someone affiliated with a major financial-services firm. There is no federal or state licensing or certification process to become a deposit broker, and the FDIC does not examine, approve or insure deposit brokers.” It adds, “CDs sold by brokers can be complex and may carry more risks than traditional CDs sold directly by banks,” and “There have been a few cases reported of unscrupulous deposit brokers allegedly misleading or defrauding investors.”
The SEC agrees: “Since brokered CDs are sold through an intermediary, you’ll need to take extra steps to avoid fraud.” Recommended precautions include: thoroughly check the background of the deposit broker, identify the issuer (CBS’ Roth found the bank he was steered to had the lowest “Safe & Sound” rating from Bankrate.com, only one out of five stars), ask about your deposit broker’s record-keeping, and find out what happens if you need to withdraw your money early.
Next, you should check if the extra interest is worth it since you’ll have to deal with paper checks. If you are writing a check from a bank account that isn’t earning interest, that is some lost days of interest right there. Since you’ll be receiving the CD funds as a check as well, that’s another few business days of potential lost interest. Finally, you should be sure only to write the check to an FDIC-insured institution. You should interact with them directly to ensure a safe transfer of funds and proper opening of an account. Double-check the CD renewal guidelines, so you are not stuck rolling the CD over for another 3 months.
Better yet, say no to any CDs that come with sales-pitch strings attached. The small interest bonus you’ll get in exchange for hearing them out likely isn’t worth your time—or the risk of them convincing you to buy their high-commission products. Deceptive financial advertisements, and bait and switch tactics, existed well before the Wall Street collapse and still do. I wouldn’t wait for regulators to start protecting the consumer, as this may not happen in our lifetimes. It’s up to us to practice little financial self-defense. Always be skeptical of any financial product, as well as the tactics that people use to sell them. Here’s a list of other companies that I found offering similar ads. Some are pretty shady in my opinion and pretend to be an elite broker supplying high-yield bank CDs. Others are pretty transparent about the fact that they are offering a carrot for you to listen to their pitch.
- Sun Cities Financial Group (http://www.scfg.com)
- First Fidelity Tax & Insurance (http://www.firstfidelityamerica.com)
- American First Assurance (http://americanfirstassurance.com)
- Integrifirst USA (http://integrifirstusa.com)
I wouldn’t trust any of these guys with a $9.99 cut-n-paste GoDaddy website and a rented office with any of my details.