About high-yield certificates

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So the Federal Reserve has raised the interest rates. It seems like a small gesture, but it’s one packed full of meaning. It shows that the gears of the American economy are slowly picking up, and that the economy is ready to start moving forward.

Our Credit Union, like most credit unions, has not increased its dividend rates on savings. There are solid reasons to show patience right now. We’re in socio-economically uncertain times, and nobody knows what things will be like a month from now, even. Markets are showing great volatility, spiking and plummeting in a matter of hours. There’s a lot of speculation and I don’t just mean stock speculation, but rather guesswork in the minds of economists and citizens alike. The expression of the times seems to be ‘wait and see’. So, credit unions, because they worry about the financial well-being of their members, wait.

Not everyone else does, though. Ads have started popping up, via email, newspapers and social media about investing in High Yield Certificates, and I want to talk about them.

A couple of years ago already, the Financial Industry Regulatory Agency (FINRA) published

Information about OAS FCU on NCUA's search service,
which indicates that they are insured. 

an alert about these ads for certificates offering high yields; many of them are switch and bait schemes, and sometimes even actual fraud. Consumers who have expressed an interest in them have been offered different products, not actual certificates of deposit, and some unwary ones ended up with altogether different investments, such as annuities.

In other occasions they committed their funds to something known as ‘structured’ or ‘market linked’ certificates (linked to an index, like the S&P 500, but riskier). If the index to which the CD is linked goes up, so does the yield of the certificate. But the opposite is also true: if it falls, the investor can even lose capital. Furthermore, the yield the consumer receives from these certificates is not the actual yield of the index, but one on which a ceiling clause has been set. The rest is pocketed by the investment company. And to make matters more daunting, some of these consumers didn’t realize that they committed their funds for insanely long periods of time, up to 20 years. Early withdrawal penalties, according to the SEC, are so hefty that they can even include loss of some of the original capital invested.

I am not saying that these CDs are a bad investment. There are times in a person’s life when risk is advisable, plus it’s good to have a varied portfolio, one with various types of investments, and different levels of risk. I explain these things because, before committing one’s money, it’s absolutely necessary to understand what the investment is, its associated risks, and the length –in time- of commitment.

Also, it’s good to mention now that banks and credit unions have had, since the 1930s, a deposit insurance fund that protects the money of clients and members in case of a financial runoff. This means that the U.S. government, via the National Credit Union Administration (NCUA) insures our members’ funds up to $250,000 per member in normal accounts (shares, share draft and share certificates), and up to $250,000 more on specific retirement investment accounts. The Federal Depository Insurance Corporation (FDIC) does the same thing for bank customers’ funds.

However, not every bank is insured by the FDIC, or every credit union by NCUA; this is a careless risk during uncertain times. So, when considering moving funds to an investment with a potentially higher return in another credit union or bank, I recommend checking on the financial health of that institution via the NCUA or FDIC, respectively.