The traditional certificate of deposit, otherwise known as the CD, has long been a popular instrument for savers to consider. Simply put, these products generally offer higher interest rates when compared to traditional savings accounts in exchange for a commitment of those funds by savers for a predetermined period of time. That said, Wall Street had taken to morph this basic CD into something that can yield, ahem, far different results. Why, then, has there been an uptick in interest over the last several years? Simple: investors have been starved for yield amid a record low interest rate environment!
Structured CDs, as these products are generally referred to, do not offer a predetermined rate of return though; instead, returns become a function of a handful of equities or other assets. With built-in caps on gains and floors on losses, many savers have found first-hand that these CDs – which were either bought by them or sold to them – are vastly different from what they thought they were putting their money in.
Our take: Do your research and consider working with a fee-only advisor who has a fiduciary duty to act in your best interest at all times.
For a more in-depth look into structured CDs, check out a recent article from the Wall Street Journal, here.