Structured CD Offerings and Elderly Financial Customers

The current financial atmosphere has resulted in very low interest rates on savings and investments. Elderly customers are finding this to be a real problem. What do you do when a bond is called early or when a CD comes due? Some banks and financial institutions are offering what they call a structured CD. It promises higher interest rates than current CD products, and it comes with FDIC protection. Or does it?

Here is a common situation: an elderly patron visits the bank and asks the branch manger what to do with a CD from ten years ago coming due. The manager says that the current CD rate is .07%, or maybe 1.2% if the money is tied up for ten years. But, says the manger, the bank’s investment guru has a new product called a structured CD. When the elderly customer inquires about it, he or she is given a single sheet of paper with different interest rates that the customer can choose and a term of 7 years or longer. And, of course, the manger says, this new piece of financial wizardry is FDIC insured.

The structured CD may be a CD in name, but it is really a fairly high risk wager. In exchange for holding the customer’s money for 7 years or more the financial institution offering the product will take that money and invest it in a small pool of stocks. They buy and sell puts and options to cover the bet. The customer is guaranteed a minimum return of zero to a very appealing return in the area of 11%. That is the catch.

There are a number of risks with structured CD offerings that make them unsuitable for elderly financial customers.

  • If the stocks rise greatly, enhancing the return beyond that which the bank wishes to pay, the financial institution has a right to call the product early and pay the customer out. This removes the upside benefit to the customer.
  • If the customer attempts to redeem early, the penalties are so significant that the redemption can cut into the principal. So the customer pays taxes on the interest each year whether it is paid or accrued.
  • The full amount of the investment and interest are not fully FDIC protected (read the fine print).
  • There is a high probability that the return will be closer to zero than the upper limit quoted.
  • Gambling on a pool of stocks as an elderly financial customer is almost never suitable for that customer.
  • The company offering the product has experts who have already designed the product so that the customer’s return is minimized.

There is no way that an elderly financial customer could ever know all the risks of such a product. The bank generally does not provide a needs analysis or a suitability analysis for the elderly customer. The money is tied up, and parts of it and the interest are at risk, as investments in complicated stock strategies.


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