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From the Wall Street Journal, “Wall Street Re-Engineers the CD—and Returns Suffer” – ‘Structured’ certificates of deposit leave many investors with lower yields and facing losses if they have to cash out early, by Jean Eaglesham, Sarah Krouse and Ben Eisen, September 6, 2016
Mary Bailey, a 79-year-old widow in Arlington, Mass., made a big deposit for her grandchildren at her Citizens Bank branch when a financial adviser there sold her on a newfangled $100,000 certificate of deposit. It would, he said, double her savings in six years, according to a later state enforcement action.
So she was irate when her first statement showed the CD’s value had fallen to $95,712, thanks to upfront fees. “This was not a CD as I know a CD,” Ms. Bailey says.
Traditional certificates of deposit offer better interest rates than normal savings accounts for customers who agree to lock up funds for a period of time. Since the 1960s, they have been among the most popular products retail banks offer. Now Wall Street has re-engineered the most bread-and-butter of investments in a way that leaves many investors with lower returns, and facing losses if they have to cash out early.
Returns on such CDs, known as market-linked or structured CDs, depend on the performance of a basket of stocks or other assets instead of a flat interest rate. CD holders get their original money back when the CD matures, usually after three to 10 years, plus a return based on the performance of certain assets or benchmarks.
