You’re right to be suspicious of higher-than-average CD rates. These are most likely pitches for high-commission investment products.
Maybe you've seen ads promoting extremely attractive CD yields with rates higher than other bank products. The promotion certainly grabs your attention, and that's what the promoters want. If you inquire about the certificate of deposit (CD), you may find yourself listening to a sales pitch and ultimately owning a very costly and potentially risky investment—something much different than a CD.
Some promotional rates may be legitimate and designed to bring in new bank or credit union customers. But others are marketing ploys in which the CD is used as the bait to try to sell you a different, high-commission product, such as a fixed or equity-indexed annuity. These annuities are complex investments that are not FDIC-insured.
Bait and Switch
Here’s how that would work. Often, the yield you see advertised for the "high yield CD" includes a "bonus," which is an amount the salesperson would pay you in addition to the CD's actual average percentage yield, or APY. This "bonus" is essentially an incentive paid by the company or salesperson to you in order to get you in the door to hear the sales pitch for another product—like those fixed or equity-indexed annuities.
If you say "no" to the other product being pitched, you can generally still buy a CD. However, the salesperson then would likely direct you to another bank where you will get the going, or average, rate. The salesperson will then likely pay you the "bonus," the difference between the CD rate offered by the issuing bank and the promotional rate that got you in the door.
If you say "yes" to the alternative financial product being pitched—typically an annuity—you're apt to get a break on the cost of buying that product; the salesperson might work up some approximated discount that's close to the interest and bonus you would have "earned" from the CD. However, you are still likely to pay a hefty commission on the other, non-CD product.
High-pressure Warning Signs
Wondering if the pitch you’ve received is one for a high-commission investment product? Here are high-pressure sales tactics to watch out for in addition to the bait and switch:
- In-Person Only— You are required or strongly encouraged to show up at an office and spend time with a salesperson.
- Phantom Riches— The salesperson dangles the prospect of wealth, often with the promise of risk-free guarantees.
- Reciprocity—The salesperson provides something, such as a meal or special offer that makes you feel obligated to reciprocate, for example by investing a large sum of money.
- Scarcity—The salesperson creates a false sense of urgency by claiming limited supply. "This offer won't last, so you better act now."
As with any investment opportunity, always check BrokerCheck to see whether the person and the firm behind the offer are registered with FINRA. If not, check with your state insurance commission since the alternative investments are often actually insurance products.
The reality with these bait-and-switch CD pitches is that you may end up walking out with a costly financial product that is not an FDIC-insured CD, and not risk-free.