Market-Linked CD’s – Your opinions?

[CuriousJoe]

Folks:

I am an EXTREMELY conservative investor nearing retirement. I have rolled over 250k from a 401K account to my IRA and looking to ‘invest’ the IRA proceeds. My initial thought was to put this in a bank CD and not in the market. However I was told that a 7 year Market-Linked CD may be a better option.

Pros:
250k FDIC insurance, protecting the principal, similar to bank CD
Slightly better yield than bank CD’s

Cons:
Capped on the market potential
I don’t need to withdraw the funds for RMD, as I have other IRA’s that I can tap into.

Appreciate your opinions. Thank you

 

[Golden sunsets]

I'm interested in the answer to the OP's question as well as where to find these products.

 

[brewer12345]

Read the fine print closely. These are usually not a good deal.

 

[CuriousJoe]

My bank - in this case Sterling National - has a financial arm where I can purchase the Market Linked CD. I am sure other banks, such as HSBC would have similar service.

Based on may 'research' for a conservative investor there is no downside compared to traditional bank CD's which are offering almost nothing in terms of returns. On the upside, Linked CD participate in the market, though 'capped' on the return.

Linked CD's are FDIC insured. However, I also read the following:

Issuer Default Risk:
MLCDs are unsecured obligations of the issuer and therefore subject to default risk. If the issuer defaults on its obligation, investors will receive significantly less than the principal amount of the structured investment, even if the product is principal-protected.

Not sure what this means..

 

[Sunset]

My bank - in this case Sterling National - has a financial arm where I can purchase the Market Linked CD. I am sure other banks, such as HSBC would have similar service.

Based on may 'research' for a conservative investor there is no downside compared to traditional bank CD's which are offering almost nothing in terms of returns. On the upside, Linked CD participate in the market, though 'capped' on the return.

Linked CD's are FDIC insured. However, I also read the following:

Issuer Default Risk:
MLCDs are unsecured obligations of the issuer and therefore subject to default risk. If the issuer defaults on its obligation, investors will receive significantly less than the principal amount of the structured investment, even if the product is principal-protected.

Not sure what this means..

I'd be cautious, as it sounds like you could lose money.
How capped are the amounts, and is that after/before whatever "fee" they are going to charge ?

By comparison ally Bank has IRA CD's available, 5 yrs at 1.25%, and if you need to cash out, the penalty is losing 6 months of interest:

https://www.ally.com/bank/ira/high-yield-cd/

 

[Independent]

I immediately think of an indexed, single premium deferred annuity. Nothing wrong with the concept, but the loads are too high. (A CD has "loads" too, they are included in the price.) So I would look very hard at the numbers.

There is also nothing wrong with putting most of your money into regular CDs and a little into a regular indexed mutual fund. Those products are simpler and subject to more price competition. If you back test or do some forward looking what-ifs, you might find that is a better option.

Maybe you will have trouble figuring out exactly what the market-linked CD will pay in various scenarios. That would be a sure indication that you shouldn't buy one.

 

[pb4uski]

I wonder if you would be better off putting 90-95% in a conventional CD and the remainder in a long dated LEAP call option.

Or SWAN.

 

[jazz4cash]

So how did you become aware of this product? In my case I would’ve never been aware of such a product except that a commissioned sales person presented them in a financial education seminar. It seemed to me that it was a means to impose additional fees. Wells Fargo was the custodian which did not give me any comfort either.

 

[Dawg52]

I reluctantly raise my hand. I bought one around 2008/9. A 5 year one that had a cap on market gains(s&p 500 I think) and a floor similar to a low end cd at the time. Well the thing performed well for 4 1/2 years and when it reached the cap....poof all the nice gains went away. And each year I had to pay taxes on the fantom gains for the year. The final year I was able to recapture those paid in taxes but it was a pita. So a lot of work for a small gain. This was not sold to me by Fidelity btw but a regional firm that I had a little money in.

Bottom line... I didn't lose money and made a little profit. And if the market hadn't roared back quite as fast it would have been a decent investment. But I have no desire to buy anymore of these products.

 

[CuriousJoe]

The bank where I rolled over my IRA into, has a 'financial arm' which sells the Linked CD. Bank is aggressively pushing me to steer this way, instead of opening a plain bank CD

 

[OldShooter]

The bank where I rolled over my IRA into, has a 'financial arm' which sells the Linked CD. Bank is aggressively pushing me to steer this way, instead of opening a plain bank CD

This post reminds me of something that I tell my Adult-Ed investing students:

"The more complex the product, the more likely that it was designed to make money for the seller and not to make money for you."
​

Just why might they be pushing the product? Maybe, just maybe, it's because the bank and the salesperson both make more money than they do on a vanilla CD.

"Aggressively pushing" would be a tripwire for me and I would be gone from that bank.

 

[Sunset]

The bank where I rolled over my IRA into, has a 'financial arm' which sells the Linked CD. Bank is aggressively pushing me to steer this way, instead of opening a plain bank CD

I can tell you the WORST mutual fund I ever got SOLD, was precisely done this way, inside my favorite trusted bank.

Turns out the financial group/person working in the bank was NOT actually a bank employee, although they fit right in and looked the same.

No wonder the mutual fund had a 5% FRONT END LOAD

I had to wash my face hard to get the word SUCKER off my forehead

 

[sheehs1]

The bank where I rolled over my IRA into, has a 'financial arm' which sells the Linked CD. Bank is aggressively pushing me to steer this way, instead of opening a plain bank CD

Google "structure linked CD" and you will find a couple of articles worth reading. Dawgs post fairly explained his experience.

These are not CD's as we all know them. Many years ago, my bank tried to sell them to me also. I listened for about 1 minute. I did not like having to pay tax on "phantom" interest or "the cap" interest I was allowed to make if the market did well or "the principle going down" if the market went down for a product that was supposed to be a CD. It is not a CD in the traditional sense but they market it as one. Basically you will get your money back if held to maturity but until then or how much you truly make is a question mark.

 

[CuriousJoe]

Thank you all.
Agree, Market Linked CD's are some what complex to understand. So, I decided to just put the amount in a bank CD yielding 0.4% !!!

 

[Sunset]

Thank you all.
Agree, Market Linked CD's are some what complex to understand. So, I decided to just put the amount in a bank CD yielding 0.4% !!!

Why didn't you put it in an Ally bank CD yielding 1.35% for 5 years

 

[pb4uski]

Heck, online savings accounts are yielding a lot more than 0.4%.

I have 2 that were each 1.15% last time I looked.

 

[CuriousJoe]

I already rolled over the amount to Sterling National savings account. Another rollover is really a PIA in these times!