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Beware of 'personal bankers'

A man sifts through garbage Harare Zimbabwe. The once well-off natinow needs international handouts.

A man sifts through garbage in Harare, Zimbabwe. The once well-off nation now needs international handouts.

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Updated: May 3, 2013 12:14PM

You walk into your bank seeking safety. You trust your bank to provide only secure, FDIC-insured deposits. But you want higher yields than the bank certificates of deposit. Those six-month CDs are currently paying less than 2 percent at most local institutions.

Now you're in the danger zone. It's happening mostly to seniors, desperate to squeeze every last drop of interest from their cash. But the desire is hitting all savers who want safety but also want more yield. And it's given new meaning to the term "money in the bank."

A friendly "banker" senses your distress. He offers his card. It says "Personal Banker." You relax. (Or maybe it's your mother who now feels she has found a friend to help her out of the low-rate dilemma.) She doesn't notice that on the bottom of the card it also says "Registered Representative."

That's right. The friendly banker is also a broker. That's because inside most banks there is a securities division, with brokers licensed to sell everything from annuities to unit investment trusts to stocks, bonds and mutual funds.

They sit in those desks next to the teller's window. And those friendly "banker/brokers" are all too happy to help a senior in distress improve her monthly income. And, by the way, they are compensated by commission on the products they sell.

Isn't it misleading to have the business card read "Personal Banker" and also Registered Representative? One bank spokesperson denied the possibility, saying: "We make it clear to customers which products are FDIC-insured and which are investment products that don't carry federal insurance."

Greed conquers sanity

So now the "banker/broker" comes up with a money idea that offers a substantially higher return. Greed -- or necessity, or ignorance -- conquers sanity. How could the bank offer more interest, without some kind of additional risk in the deal?

The answer is, they can't. These products being sold inside the banks are actually quite different from those safe, insured money-market deposit accounts or CDs. These products come with sales charges, ongoing management fees and penalties for early withdrawals. Even worse, many have the potential for loss of principal.

But the friendly "personal banker" doesn't quite explain all that. Instead he draws a chart of how much more money you'll earn every month. And how much more you'll be earning at the end of the year, and after five years.

Do you think I made up this story to make a point? Well, I didn't. It comes directly from a co-worker whose mother, Margaret, went to one of the largest, best-known banks in town. She was looking for a certificate of deposit, but she came home with information about a Unit Investment Trust preferred securities portfolio -- a fixed portfolio of dividend-paying, preferred stocks.

Here's why this investment is definitely not an alternative to a CD:

1. It carries a 1 percent sales charge upfront.

2. It carries an additional deferred sales charge and fee amounting to 3.95 percent -- which is subtracted from the account over months four through nine. The total fee is 5 percent!

3. She has the potential to lose a portion of her investment through exposure to interest rate risk. (If interest rates rise, the value of the preferred stocks inside the fund will fall, and so will the price of the fund.) Then, when she sells, she could get back far less than she invested.

4. It is not FDIC insured. If the securities inside the fund default, there is no guarantee she'll get her investment back.

5. There's no guaranteed liquidity. Many unit investment trusts that were sold as liquid, accessible "alternatives to money market funds" now are locked up because the internal investments -- auction rate preferred securities -- are not being traded owing to the credit crunch.

This senior citizen -- and her son who asked me about it -- certainly didn't understand all these exposures to risk.

For years, I've talked about the concept of "chicken money." That's money you can't afford to lose. It's money that belongs in short-term FDIC-insured deposits or Treasury bills or money-market funds.

Yes, it's certainly sad for savers that the Fed is punishing them with low interest rates in order to "save" the financial system. But you must remember the motto of the "chicken money" investor: I'm not so concerned about the return ON my money as I am about the return OF my money!

These days, when the term "money in the bank" is not quite what it used to mean, it pays to remember that principle and to read the fine print. And that's The Savage Truth!

Terry Savage is a registered investment adviser. Distributed by Creators Syndicate.

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