These CDs are usually market-linked or structured so that their performance depends on a basket of stocks or other assets instead of a flat interest rate like traditional CDs. When they mature CD holders get their original money back plus a return based on the performance of certain assets or benchmarks.
Banks love these CDs because they are an inexpensive sources of funding that generate huge fees all the way down the chain. The issuer gets fees and the financial adviser gets paid more for selling a market-linked CD than a conventional CD or a mutual fund. Typically, an adviser who sells the CD can get commissions of up to 3% of the CD’s value.
However, brokers are getting paid to recommend an investment that does not perform as well as traditional CDs and other safe investments. It’s even difficult to determine how structured CDs perform but an analysis by the Wall Street Journal found that after analyzing investment returns data on hundreds of market-linked CDs created by Barclays PLC, that many under performed conventional CDs because upside gains on the underlying assets are limited by the terms of the investment.
According to the article, of the 325 Barclays CDs reviewed more than half of those returns were lower than an investor would have earned from an average five-year conventional CD. In addition, of the 118 structured CDs issued at least three years ago only one-quarter posted returns better than those of an average five-year conventional CD and about 25% produced no returns at all. Similarly, an analysis of 147 market-linked CDs issued since 2010 by Bank of the West, a subsidiary of BNP Paribas SA, revealed that 62% produced returns lower than an investor would have received from a five-year conventional CD.
Naturally, wall street has every interest in hiding this data from investors. What investor wants to be told that the bank and broker will make more money off of their investment then the investor who actually assumes the investment risk. Moreover, if investors knew that statistically it was more probable than not that the investor would be better off in a traditional CD there would be no market for the structured CD and accordingly no lucrative bank fees.
The investment fraud attorneys at Gana Weinstein LLP represent investors who have suffered securities losses due to the mishandling of their accounts. The majority of these claims may be brought in securities arbitration before FINRA. Our consultations are free of charge and the firm is only compensated if you recover.