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Market-Linked CDs
Old 02-27-2016, 01:53 PM   #1
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Market-Linked CDs

My brother has called me up saying his financial advisor is recommending a market-linked CD for investing $220K+. He is guaranteeing 7%. This is a very reputable advisor -- oversaw investments for the county government for 20+ years, retired and formed his own investment group.

I did a quick web search on market linked funds/investments and they seem to good to be true.

What are the pros and cons?

Thanks in advance for any comments.
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Old 02-27-2016, 02:40 PM   #2
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This guy didn't work for Orange County by any chance? http://www.nytimes.com/1994/12/31/yo...1iht-mrca.html

I added "rip-off" to a Google search for market-linked cd:

http://www.finra.org/investors/alert...gs-signal-scam
https://www.fdic.gov/consumers/consu...linkedcds.html
http://www.fool.com/retirement/gener...portfolio.aspx
http://www.buyupside.com/articles_ot...etlinkedcd.htm
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Old 02-27-2016, 02:42 PM   #3
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Banks have been pushing this type of investment for years.


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Old 02-27-2016, 02:49 PM   #4
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And another link:
https://www.bogleheads.org/wiki/Market-linked_CD

Listen, there is no such thing as a free lunch.

BTW, I've never seen the word "reputable" used to describe an advisor selling these things.
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Old 02-27-2016, 02:49 PM   #5
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Without being able to see the documentation for the specific security in question it's impossible for anyone to comment with specifics.

But "too good to be true" would be my guess.

Market-linked CDs are a structured product that will end up having lots of gotcha fine print and high fees.

You can create the same basic structure yourself with lower cost by buying an S&P Index call option and a CD.
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Old 02-27-2016, 03:24 PM   #6
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If it is too good to be true then it is. While there are market-linked CDs offered by banks, they do not guarantee 7%. No legitimate financial institution would be foolish enough to guarantee 7%.
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Old 02-28-2016, 01:50 AM   #7
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Guaranteed 7 %. In todays environment ! RUN DON'T LOOK BACK

Looks like a scam.
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Old 02-28-2016, 05:21 AM   #8
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Quote:
Originally Posted by wolf View Post
Guaranteed 7 %. In todays environment ! RUN DON'T LOOK BACK

Looks like a scam.

Yeah, probably better to wait for interest rates to rise a bit so you can get 10%.
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Old 02-28-2016, 05:27 AM   #9
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This product is different but I have been offered structured products by FAs. Some seem decent...limited downside, capped upside over a multi-year period. But thankfully I asked a key question: given they are multi-year, is the gain short or long term capital gains? Ordinary income. Forget that! At my tax bracket it very much limited the upside even further. I declined. Point is, read the fine print and ask key questions. Better yet, just avoid!
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Old 02-28-2016, 07:08 AM   #10
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Typically these things work by using the interest from a fixed income vehicle to purchase call options on an underlying index. There is no way 7% can be guaranteed unless the interest on the fixed income vehicle by itself is greater than 7% (which would be an extremely risky fixed income vehicle in the current interest-rate environment). My guess is that he is talking about the expected return, not the guaranteed return.
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Old 02-28-2016, 07:33 AM   #11
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Maybe this product has a money-back guarantee. If it doesn't make a 7% return, you get your money back, no questions asked! That's the type of guarantee I would expect written in the fine print with a product like this.
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